Beruflich Dokumente
Kultur Dokumente
QUESTIONS
2 What would be the most appropriate cost unit for a cake manufacturer?
Cost per:
A cake too small to be cost unit
B batch
C kg input may not equal to output
D production run might relate to different quantities of output
3 For operational purposes, for a company operating a fleet of delivery vehicles, which of
the following cost units would be most useful? Revenue normally based on the quantity delivered
and the distance travelled.
A Cost per mile run Friend, do you remember the composite cost unit in CHAPTER 9
B Cost per driver hour Service Costing?
C Cost per tonne mile
D Cost per kilogram carried
4 The double entry for the materials charged to WIP would have been:
A DR WIP control, CR Stores ledger control
B DR Stores ledger control, CR WIP control
C DR Production overhead control, CR WIP control
D DR WIP control, CR Production overhead control
5 The double entry for the production overhead recovered in the period, would have been:
A DR Finished goods control, CR Production overhead control
B DR Production overhead control, CR WIP control
C DR WIP control, CR Production overhead control
D None of these
6 The double entry for the transfer of finished goods would have been:
A DR Finished good control, CR WIP control
B DR Cost of sales account, CR WIP control
C DR WIP control, CR Finished goods control
D DR Finished goods control, CR Cost of sales
7 Which of the following would be included in the financial accounts, but may be
excluded from the cost accounts?
A Direct material costs part of Product Cost
B Depreciation of storeroom handling equipment part of Product Cost
C Bank interest and charges
D Factory manager’s salary part of Product Cost
9 Which one of the following may be included in the cost accounts but excluded from the
financial accounts?
A Depreciation of equipment
B Distribution expenses
C Factory manager’s salary
D Notional rent rent paid to HQ (liked son gives money to father)
10 In an interlocking system, what would be the entry for the issue of indirect material from
inventory?
Account debited Account credited
A Material inventory Production overhead
B Material inventory Work-in-progress
C Production overhead Material inventory
D Work-in-progress Material inventory
15 Which of the following are used for the capture and storage of management accounting
data by computer?
(i) Bar code capture
(ii) Disk storage
(iii) Printer output device
(iv) Tape storage
A (i) and (ii) only
B (i), (ii) and (iv) only
C (i), (iii) and (iv) only
D (ii), (iii) and (iv) only
17 Which of the following only contains essential features of useful management information?
A Accurate, clear, presented in report format
B Timely, reliable, supported by calculations
C Regular, complete, communicated in writing
D Clear, accurate, relevant for its purpose
Revise again CHAPTER 1 – Management Information IF you got the wrong answer!!!
18 In an integrated cost and financial accounting system, what would be the entry to
record direct labour costs being charged to production? Integrated accounting system always
involved LEDGER CONTROL a/c!!!
Debit Credit
A Financial ledger control Work-in-progress
B Production overhead Wages control
C Finished goods Work-in-progress
D Work-in-progress Wages control
22. Which of the following statements about cost and management accounting are true?
1. Cost accounting cannot be used to provide inventory valuations for external
financial reporting The inventory valuation also used for financial accounting
2. There is a legal requirement to prepare management accounts This statement is applied
for financial accounts.
3. The format of management accounts may vary from one business to another
4. Management accounting provides information to help management make business
decisions
A 1 and 2
B 1 and 4
C 2 and 3
D 3 and 4
23. Which of the following are features of an efficient and effective cost coding system?
1. Codes need to be complex to include all items Must be simplified
2. Each code must have a combination of alphabetic and numeric characters
3. Codes for a particular type of item should be consistent in length and structure
A 1 only
B 3 only
C 1 and 2
D 2 and 3
24. Secondary source of information include documents or reports written for a specific purpose.
A True
B False Primary source
A 1 and 3 only
B 2 and 4 only
C 1, 3 and 4
D 1, 2 and 3
28. Which of the following may be used for capturing or storing management accounting data
by computer?
1) Scanner input device
2) Printer output device
3) CD storing
4) Bar code reader capturing
A 1 and 2 only
B 3 and 4 only
C 1, 3 and 4 only
D All four items
29. The cost accounts of a business are kept separate from the financial accounts but the two
sets of accounts are reconciled each period.
What accounting system is being described?
A Cost control accounts
B Cost ledger accounts
C Integrated accounts
D Interlocking accounts
Prepared by Jessy Chong 张愫芯 5
CAT – Intermediate Level T4 – Accounting For Costs
Illustration 1
Within the costing system of a manufacturing company the following types of expenses are
incurred.
Reference
1 Cost of oils used to lubricate production machinery Product costs – indirect materials
2 Motor vehicle licenses for lorries Selling and distribution costs
3 Depreciation of factory plant and equipment Product costs – indirect expenses
4 Cost of chemicals used in the laboratory Research and development costs
5 Commission paid to sales representatives Selling and distribution costs
6 Salary of the secretary to the finance director Administration costs
7 Trade discount given to customers Selling and distribution costs
8 Holidays pay of machine operatives Product costs – indirect labour
9 Salary of security guards in raw material warehouse Product costs – indirect labour
10 Fees to advertising agency Selling and distribution costs
11 Rent of finished goods warehouse Selling and distribution costs
12 Salary of scientist in laboratory Research and development costs
13 Insurance of the company’s premises Administration costs
14 Salary of supervisor working in the factory Product costs – indirect labour
15 Cost of typewriter ribbons in the general office Administration costs
16 Protective clothing for machine operatives Product costs - indirect expenses
Required: Complete the following table by placing each expense in the correct cost
classification.
Cost classification Reference number
Product costs 1 3 8 9 14 16
Selling and distribution costs 2 5 7 10 11
Administration costs 6 13 15
Research and development costs 4 12
Each type of expense should appear only once in your answer. You may use the reference numbers in your answer.
Illustration 2
Cost Items Direct or Indirect
Fabric used in chair manufacture Direct materials
Staples used in a book printing company Indirect materials
Direct operatives in the factory Direct labours
Supervisor in the factory Indirect labours
Training of direct workers Indirect labours
Rental of factory Indirect expenses
Electricity and water expenses Indirect expenses
Cleaning materials Indirect materials
Illustration 3
Use the high-low method to calculate the fixed and variable elements of the following costs:
Month Activity $
January 400 1,050
February 600 1,700
March 550 1,600
April 800 2,100
May 750 2,000
June 900 2,300
Solution:-
Illustration 4
Inspection costs for the six months to 31 December 20x9 are as follows:
Month Units produced Cost ($)
July 340 2,260
August 300 2,160
September 380 2,320
October 420 2,400
November 400 2,300
December 360 2,266
Required:
(i) Use the high-low method to calculate the fixed costs per month and the variable cost per
unit.
Variable cost per unit Total fixed cost
(ii) What is the estimate of the Inspection costs if 500 units produced? (Answer: $2560)
Total Inspection costs = Total fixed cost + (variable cost per unit x units produced)
= $1,560 + ($2.00 per unit x 500u)
= $2,560
Illustration 5
Details of product Wyexec
Production Level (units) 20000 24000 35000
Total Costs ($’000) 168 200 288
(i) Calculate, using high-low method, the fixed costs and variable costs per unit of product
Wyexec. (Answer: vc/u = $8; Total FC = $8000)
(ii) What will the total costs be, if company wish to produce 40000 units of product Wyexec and
with production of 36000 and above, the excess will be entitled a 30% discount on variable
costs. (Answer: $318,400)
Test yourself...
Which of the following would be regarded as a stepped-fixed cost in the annual operation of a
motor vehicle?
A Hire purchase payments fixed cost
B Insurance fixed cost
C Petrol variable cost
D Tyre replacement stepped-fixed cost
Which of the following would be classified as a fixed cost in the operation of a motor vehicle?
A Oil change every 10,000 kilometres variable cost
B Petrol variable cost
C Insurance fixed cost
D Tyre replacement stepped-fixed cost
QUESTIONS
1 Which of the following would be classed as indirect labour?
A Assembly workers direct labour
B A stores assistant in a factory store indirect labour
C Plasterers in a building company direct labour
D An audit clerk in an accountancy firm direct labour
3 A firm is trying to find a relationship between its sales volume in a quarter and its
telephone expense that quarter.
Total costs
4 The following data are records of output levels and overhead costs.
January December
Hours worked 18,000 21,000
Total costs $86,800 $97,438 (W1)
There were 3% inflation between January and December. The variable cost per hour
worked, at January price levels and to the nearest $0.01, is:
A $4.52
B $2.68
C $3.55
D $2.60
$A = $97,438 ÷ 1.03
= $94,600
= $2.60
6 The following information relates to the overhead costs of the production department:
14 Total production costs and output over three periods have been:
Y= a + bx
Where y represent the total costs $156,980 = a + ($12.20 per unit x 7,400unit)
a represents the total fixed costs a = $156,980 - ($12.20 per unit x 7,400unit)
b represents the variable costs per unit = $66,700
x represents the number of units of output
A company has variable costs of $12.20 per unit (b) and total costs, for output of 7,400
units(x) in a period, of $156,980(Y).
Using the above formula and information, what are the total fixed costs in the period?
A $42,540
B $66,700
Prepared by Jessy Chong 张愫芯 11
CAT – Intermediate Level T4 – Accounting For Costs
C $90,280
D $247,260
16 A company currently produces 6,000 units of its single product each period, incurring
total variable costs of $60,000 and fixed costs of $42,000.
Total costs = $102,000 Cost per unit = $17.00
Production will increase to 8,000 units per period if the company expands capacity,
resulting in changes both to the variable costs per unit and to the total fixed costs.
For production of 8,000 units per period total variable costs would be $76,000 and fixed
costs $50,000.
Total costs = $126,000 Cost per unit = $15.75
What is the reduction in total cost per unit comparing the costs for 8,000 units per period
with the unit costs currently being incurred?
A $0.50
B $0.75
C $1.25
D $2.08
If the level of activity in the period is increased by 50% what change would occur in Cost
Z per unit of activity?
A Decrease by a third
B Decrease by a half
C Increase by a third
D Increase by a half
18 Production units and total costs relating to the last three periods have been:
Period 1 Period 2 Period 3
Production (units) 129,440 117,620 126,310
Total costs ($) 198,968 187,739 195,376
Using the high-low method, what is the estimated variable cost per unit of production?
A $0.87 variable cost per unit
B $0.95 = $198,968 - $187,739
C $1.05 129,440 – 117,620
D $1.15 = $0.95 per unit
B $14.84
C $15.20
D $17.00
21 The following shows the cost per unit of an item of expense at different levels of activity:
Activity (units) Cost per unit ($) Total Costs ($)
1 10,000 $10,000
50 200 $10,000
100 120 $12,000
150 80 $12,000
What is the correct behavioural classification for the expense item?
A Fixed cost
B Semi-variable cost
C Stepped-fixed cost
D Variable cost
22 The table shows the total of Cost Y at different production levels of Product X:
Units of Product X Total Cost Y ($000)
50 60
100 60 fixed cost
150 60 cost increased when the production units up to another level.
200 90 fixed cost
250 90
What could have been the cause of the increase in cost?
A Increased fuel and maintenance costs for delivery vehicles
B Increased storage requirements
C Loss of discounts on raw materials
D Pay increase for direct labour.
Question 1 Bronze
Bronze recorded the following costs for the past months.
Month Activity level Total cost
Units $
1 80 6,586
2 60 5,826
3 72 6,282
4 75 6,396
5 83 6,700
6 66 6,054
(a) Estimate the fixed costs per month and variable cost per unit using the high-low method.
(b) Estimate the total costs for the following activity levels in a month:
(i) 75 units Total costs = $3,546 + (75u x $38 per unit)
= $6,396
(ii) 90 units Total costs = $3,546 + (90u x $38 per unit)
= $6,966
Question 2
A company manufactures and retails clothing.
You are required to group the costs which are listed below and numbered 1 to 20 into the
following classifications (each cost is intended to belong to only one classification):
direct materials 9
direct labour 16
direct expense 10
indirect production overhead 1 6 8 18 19
research and development costs 7 20
selling and distributing costs 11 12 13 17
administration costs 2 3 4 14 15
finance costs 5
1 lubricant for sewing machines
2 floppy disks for general office computer
3 maintenance contract for general office photocopying machine
4 telephone rental plus metered calls
5 interest on bank overdraft
6 Performing Rights Society charge for music broadcast through the factory
7 market research undertaken prior to a new product launch
8 wages of security guards for factory
9 carriage on purchase of basic new materials
10 royalty payable on number of units of product XY produced
11 road fund licenses for delivery vehicles
12 parcels sent to customers
13 cost of advertising products on television
14 audit fees
15 chief accountant’s salary
16 wages of operatives in the Cutting Department
Question 3
Definitions
(a) Define the terms ‘cost centre’ and ‘cost unit’.
Answer: - Cost centre where managers are accountable for the expenses (costs) that are under their control.
- Cost unit is a unit of product which has costs attached to it. It is the basic control unit for costing purposes.
(b) Distinguish between direct and indirect costs and discuss the factors which should
influence whether a particular cost is treated as direct or indirect in relation to a cost unit.
Answer: - Direct costs are costs that can be directly identified and can be traced in full to a cost unit.
- Indirect costs are costs that are incurred in the course of making a product or providing a service but
they are not able to be traced directly or attributable to a cost unit.
- The total of direct costs is called as prime costs while the total indirect costs is called as overheads.
Question 4
A firm’s cost function may be expressed as:
y=a + bx y is the total cost
a is the total fixed cost
b is the variable cost per unit
x is the number of units of output
The total cost for output of 9,200 units (x) in a period is $52,600(y) and the total period fixed cost
is $25,000(a).
The fixed cost will increased by $5,000 for output of 12,000 units and above.
(iii) The cost per unit for output of 8,500 units in a period;
Y = $25,000 + (8,500u x $3 per unit)
= $50,500
(iv) The cost per unit for output of 13,000 units in a period;
Y = $30,000 + (13,000u x $3 per unit)
= $69,000
Question 5
The LiewCF Corporation is a manufacturer of a product called Alphabet Coil. Unit costs are as
follows:
$
Direct materials 300 (i)
Direct labour 50 (ii)
Variable production cost 90 (iii)
Fixed production cost (depreciation of machinery) 160 (iv)
Sales commission (2% of sales) 20 (v)
Administrative salaries 80 (vi)
Total 700 (vii)
Illustration 1
LCF Ltd is a small company that was set up at the beginning of May 20x9 by the issue of $20,000
of shares for cash. LCF Ltd purchases three types of material: A, B and C. During the month of
May 20x9 the purchases of each type of material were as follows:
Material A Material C
3 May $2,000 1 May $4,000
24 May $9,000 7 May $4,000
28 May $4,000
Material B
6 May $5,000
10 May $3,000
21 May $7,000
Purchases of materials A and B are for cash and material C is on credit of 45 days. Record these
transactions in the individual inventory ledger accounts as well as the cash and creditor
accounts.
Material A Material B Material C
3 May $2,000 6 May $5,000 1 May $4,000
24 May $9,000 10 May $3,000 7 May$4,000
21 May $7,000 28 May $4,000
Cash Payable
Share capital $20,000 1 May – C $4,000
3 May – A $2,000 7 May – C $4,000
6 May – B $5,000 28 May – C $4,000
10 May – B $3,000
21 May – B $7,000
24 May – A $9,000
Illustration 2
Classify the following costs into different categories of stock costs.
i. Petrol Charges ordering costs
ii. Delivery person’s salaries ordering costs
iii. Purchasing staff’s salaries ordering costs
iv. Insurance costs for stocks holding costs
v. Lost of sales stock-out costs
vi. Telephone charges for making purchases ordering costs
vii. Interest costs on working capital financing holding costs
viii. Rental of warehouse holding costs
ix. Administrative expenses for making purchases ordering costs
x. Decrease in goodwill stock-out costs
Illustration 3
Period 1 Period 2 Period 3 Period 4 Period 5
Opening Stock 10,000 15,000 12,000 15,000 11,000
llustration 4
i. There are 480 units(P) of Material X in stock. An order for 950(Q) is expected to be received
and a material requisition for 550(U) has not been issued to the production cost centre. What
is the free stock?
Free Stock =P+Q-U
= 480u + 950u – 550u
= 880u
ii. There are 27,500 units(Q) of Part Number X53 on order with the suppliers and 16,250 units(U)
outstanding on existing customer’s orders.
If the free stock is 13,000 units, what is the physical stock?
Free Stock =P+Q-U
13,000u = P + 27,500u – 16,250u
P = 13,000u + 16,250u – 27,500u
= 1,750u
Illustration 5
The data below relates to an item of raw material:
Calculate:
(i) The reorder level = max. Usage x max. lead time
= 250u x 30 days
= 7500u
(ii) The maximum level = Reorder level + reorder quantity – (min. usage x min. lead time)
= 7500u + 5,000u – (250u x 20days)
= 7500u
(iii) The minimum level = Reorder level – (avg. usage x avg. lead time)
= 7500u – (250u x 25days)
= 1250u
Illustration 6
A national chain tyre fitters stocks a popular tyre for which the following information is available:
(a) Based on the data above, at what level of stocks should replenishment order be issued?
The minimum level = Reorder level – (avg. usage x avg. lead time)
= (175tyres x 16days) – (140tyres x 13days)
= 980tyres
(b) Based on the data above, what is the maximum level of stocks possible?
The maximum level = Reorder level + reorder quantity – (min. usage x min. lead time)
= 2800tyres + 3,000tyres – (90tyres x 10days)
= 4900 tyres
Illustration 7
A large retailer with multiple outlets maintains a central warehouse from which the outlets are
supplied. The following information is available for Part number SF525.
b) Based on the data above, what is the approximate number of Part SF525 carried as buffer
stock?
The minimum level = Reorder level – (avg. usage x avg. lead time)
= 6,300u – (350u x 13d)
= 1,750u
Illustration 8
The following information is available in respect of component D20
a) Reorder level
The reorder level = max. Usage x max. lead time
= 1500u x 4months
= 6000u
b) Reorder quantity
The maximum level = Reorder level + reorder quantity – (min. usage x min. lead time)
8400u = 6000u + reorder quantity – (800u x 2months)
Illustration 9
Two components A and B are used as follows:
b) Minimum level
The minimum level = Reorder level – (avg. usage x avg. lead time)
c) Maximum level
The maximum level = Reorder level + reorder quantity – (min. usage x min. lead time)
QUESTION: RUBBER-Co
RUBBER-Co is a manufacturer that produces rubber shoes which requires latex as the main
material.
Latex is imported from another. Following are the data relates to the latex for year 20x8:
Total usage (D) 225,000 kg
Purchase price (P) $1 per kg
Cargo charges (O) $3,500 per order
Warehouse costs per kg(H) $0.375 per kg per annum
Company has produced the following forecasts for the year 20x9:
- Rubber usage will increase by 20% than last year 225,000kg x 1.2 = 270,000kg
- Due to rubber shortage, purchase price is forecasted to increase by $0.40 per kg. $1.40 per kg
- Cargo charges(O) $3,500 per order and warehouse costs(H) $0.375 per kg will remain constant at
year 20x8’s prices
D = 270,000kg
P = $1.40 per kg
O = $3,500 per order
H = $0.375 per kg
RUBBER-CO’s purchasing department is deciding to identify their order sizes and is considering
order sizes of 30,000kg, 45,000kg, 60,000kg and 75,000kg
a) Produce a table which shows RUBBER-Co’s annual stock costs which comprise of ordering
costs and holding costs for each order size for year 20x9
Order level (kgs) 30,000 45,000 60,000 75,000
Total Ordering costs $3500 x 270k/30k $3500 x 270k/45k $3500 x 270k/60k $3500 x 270k/75k
O x D/Q $31500 $21000 $15750 $12600
Total Holding costs $0.375 x 30k/2 $0.375 x 45k/2 $0.375 x 60k/2 $0.375 x 75k/2
H x Q/2 $5625 $8437.50 $11250 $14062.50
Total Stock costs $37125 $29437.50 $27000 $26662.50
Ps: EOQ without discount – calculate the total stock costs = Total Ordering Costs + Total Holding Costs
b) Use the economic order quantity formula to determine the optimal order size and compare
the results in your answer in (a)
For year 20x9 RUBBER-CO receives another offer from an alternative supplier which can provide
attractive discounts for bulk purchase:
Purchase quantity Discount level
Less than 65,000 kg No discount
65,000 – 79,999 kg 0.8% discount
80,000 – 89,999 kg 1.0% discount
90,000 kg and above 1.2% discount
(W1) EOQ without discount is 71,000kgs. What’s the EOQ with discount?
Q: If the warehouse cost is 37.5% of purchase price instead of $0.375 per kg, how will the EOQ
calculations be different? Holding cost = $1.40/kg x 0.375 = $ 0.525/kg
QUESTIONS
1. Which of the following costs would be needed in order to calculate the economic order
quantity?
1 The cost of storing materials holding costs
2 The cost of interest incurred in financing materials holding costs
3 The cost of ordering materials ordering costs
4 The cost of insuring materials holding costs
A Items 1 and 2 only C Items 1, 3 and 4 only
B Items 3 and 4 only D Items 1, 2, 3 and 4
2. Which of the following is NOT relevant to the calculation of the economic order quantity of a
raw material?
A Ordering cost C Stockholding cost
B Purchase price D Usage
3. A company currently purchases Material X in order quantities of 500 units. The annual
demand for the material is 2,500 units and the stock holding cost is $3 per unit per annum.
What will be the annual stock holding costs?
A $750 C $3,750
B $1,500 D $7,500
Total Holding Costs = H x Q/2
= $3/u x 2,500u/2
= $3750
5. James Ltd produces a product called the KIWI. The cost of the raw material used to make
the KIWI is $10 per kg (P). During a typical year 15,000 kgs (D) of the raw material are used.
The cost of a typical order for the raw material is $250(O) and the annual cost of holding
stock as a percentage of cost is 10% ( $10 x 10%= $1/kg).
What is James Ltd’s EOQ?
A 7,500,000 kgs C 2,739 kgs
B 75,000,000 kgs D 866 kgs
6. The annual demand for a stock item is 2,500 units(D). The cost of placing an order is $80(O)
and the cost of holding an item in stock for one year is $15(H).
What is the economic order quantity, to the nearest unit?
A 31 units C 163 units
B 115 units D 26,667 units
7. A component has a safety stock of 280, a recorder quantity of 1,200 and a rate of demand
which varies between 100 and 400 per day. The average stock of the component is:
A 800 C 920
B 880 D 1,480
There are two ways to calculate Average Stock.
Safety stock + ½ reorder quantity (max. stock + min. stock) ÷ 2
= 280u + ½ (1200u)
= 880u
8. A component has a safety stock of 500, a reorder quantity of 3,000 and a rate of demand
which varies between 200 and 700 per week. The average stock is approximately:
A 2,000 C 2,500
B 2,300 D 3,500
There are two ways to calculate Average Stock.
Safety stock + ½ reorder quantity (max. stock + min. stock) ÷ 2
= 500u + ½ (3000u)
= 2000u
9. In the context of calculating stock control levels, what is the meant by term ‘lead time’?
A The time between raising a purchase requisition and the relevant materials being
received into stock.
B The time between materials stock reaching the minimum level and a stock out occurring
C The time between placing an order for materials and the relevant materials being
received into stock
D The time between the current date and the date at which a stock out will occur at
current levels of usage
11. Which of the following functions are fulfilled by a good received note (GRN)?
(i) Provides information to update the stock records on receipt of goods
(ii) Provides information to check the quantity on the supplier’s invoice
(iii) Provides information to check the price on the supplier’s invoice
A (i) and (ii) only C (ii) and (iii) only
B (i) and (iii) only D All of them
b) Prove your answer in (a) using EOQ formula, and EOQ graph
Y-Values
60000
50000
40000
30000
Y-Values
20000
10000
0
0 10000 20000 30000
Question 2 Manufacturing Co
A small manufacturing company produces a range of small tools. The tools are only sold in
composite sets. The sets are packed in a plastic storage box which is ‘bought in’ from another
company.
The company is trying to decide the size of order to place with the supplier of the storage boxes
and is considering order sizes of 50, 100, 200, 250, 500 or 1,000 boxes.
(a) Produce a table that shows the total annual:
(i) delivery costs Total Ordering costs
(ii) storage costs Total Holding costs
(iii) delivery plus storage costs Total Stock costs
Order size (boxes) 50 100 200 250 500 1000
Total Ordering Costs $20 x 1000/50 $20 x 1000/100 $20 x 1000/200 $20 x 1000/250 $20 x 1000/500 $20 x 1000/1000
O x D/Q $400 $200 $100 $80 $40 $20
Total Holding Costs $1 x 50/2 $1 x 100/2 $1 x 200/2 $1 x 250/2 $1 x 500/2 $1 x 1000/2
H x Q/2 $25 $50 $100 $125 $250 $500
Total Stock Costs $425 $250 $200 $205 $290 $520
(b) Use the economic order quantity formula to determine an appropriate order size.
The economic order quantity formula is given as:
EOQ = 2CoD
Ch
Where D = Annual demand, Co = Delivery (ordering) costs, and Ch = Annual holding cost/unit
(c) The supplier of the storage boxes now says that it is prepared to offer bulk discount at the
following levels;
Illustration 10
A company uses two very similar types of fixing bracket, Z99 and Z100. The brackets are
purchased from an outside supplier. When the company undertakes a stock check it finds some
differences as shown below:
Illustration 11
Failure to record stock returned to stores will result in which of the following if a physical stock-
take was not undertaken?
Stock Quantity Production Costs
A Higher than shown on record card Higher than it should be
B Lower than shown on record card Higher than it should be
C Lower than shown on record card Lower than it should be
D Higher than shown on record card Lower than it should be
Actual quantity > stock record = closing stock closing stock Production cost
(iii) The average cost method of pricing, where the average cost is calculated upon each
stock movement (that is, the weighted average method).
Date Received Issued Balance
01 Jan 100u x $4.50 = $450
03 Feb 70u x $4.50 = $315 30u x $4.50 = $135
04 Mar 40u x $5.20 = $208 30u x $4.50 = $135
40u x $5.20 = $208
70u $343
Cost per unit $4.90
06 Jun 20u x $4.90 = $98 50u x $4.90 = $245
17 Aug 50u x $4.90 = $245 50u x $4.90 = $245
50u x $4.90 = $245
100u $490
Cost per unit $4.90
10 Oct 30u x $4.90 = $147 70u x $4.90 = $343
17 Nov 20u x $5.35 = $107 70u x $4.90 = $343
20u x $5.35 = $107
90u $450
Cost per unit $5.00
02 Dec 30u x $5.00 = $150 60u x $5.00 = $300
(iv) The average cost method of pricing, where the average cost is calculated at the end of
the period (that is, the periodic weighted average method).
(W1)
$450 + $208 + $245 + $107 = $4.81/u
100u + 40u + 50u + 20u
Question 2 K, L, M
Three students, K, L and M are equal partners in a joint venture which involves them, on a part-
time basis, buying and selling bags of product G. The transactions for the six months ended 30
September were stated as below. You are to assume that purchases at unit costs given were at
the beginning of each month and that the sales were made at the end of each month at the
fixed price $1.50 per bag.
Month Purchases Sales
Bags Unit cost ($) Bags
April 1,000 1.00 500
May 500 1.20 750
June 1,000 1.00 Nil
July Nil - 600
August 500 1.20 650
September 500 1.30 600
In October the student partners held a meeting to review their financial position and share out
the profits but there was disagreement because each partner had priced the issues on a
different basis. K had used FIFO, L had used LIFO and M had used a weighted average. It was,
however, agreed that the stock remaining at the end of September should be stored until next
April.
(a) Show the records which each student kept of the transactions.
K: FIFO
Date Received Issued Balance
April 1000u x $1 = $1000 500u x $1 = $500 500u x $1 = $500
May 500u x $1.2 = $600 500u x $1 = $500 250u x $1.2 = $300
250u x $1.2 = $300
June 1000u x $1 = $1000 250u x $1.2 = $300
1000u x $1 = $1000
July 250u x $1.2 = $300 650u X $1 = $650
350u x $1 = $350
August 500u x $1.2 = $600 650u x $1 = $650 500u x $1.2 = $600
September 500u x $1.3 = $650 500u x $1.2 = $600 400u x $1.3 = $520
100u x $1.3 = $130
L: LIFO
Date Received Issued Balance
April 1000u x $1 = $1000 500u x $1 = $500 500u x $1 = $500
May 500u x $1.2 = $600 500u x $1.2 = $600 250u x $1 = $250
250u x $1 = $250
June 1000u x $1 = $1000 250u x $1 = $250
1000u x $1 = $1000
July 600u x $1 = $600 650u X $1 = $650
August 500u x $1.2 = $600 500u x $1.2 = $600 500u x $1 = $500
150u x $1 = $150
September 500u x $1.3 = $650 500u x $1.3 = $650 400u x $1 = $400
100u x $1 = $110
M: AVCO
Date Received Issued Balance
April 1000u x $1 = $1000 500u x $1 = $500 500u x $1 = $500
May 500u x $1.2 = $600 750u x $1.1 = $825 500u x $1 = $500
500u x $1.2 = $600
Cost per unit $1.10
250u x $1.1 = $275
June 1000u x $1 = $1000 250u x $1.1 = $275
1000u x $1 = $1000
Cost per unit $1.02
July 600u x $1.02 = $612 650u x $1.02 = $663
August 500u x $1.2 = $600 650u x $1.10 = $715 650u x $1.02 = $663
(b) Show the amount each student ought to receive if the whole of the profit arising from
each method of pricing the issues was distributed.
K L M
Sales ($) 4650 4650 4650
COS 3330 3460 3372
Profit 1320 1190 1278
QUESTIONS
1. A company uses the first-in, first-out (FIFO) method to price issues of raw material to
production and to value its closing stocks.
Which of the following statements best describes the first-in, first-out method?
A The last materials received will be the first issued to production
B The first materials issued will be priced at the cost of the most recently received materials
C The last materials issued will be those that were most recently received
D The first materials issued will be priced at the cost of the earliest goods still in stock
2. If a company is using the first-in, first-out method for material issues at a time when materials
prices are rising this will mean which of the following?
A Production costs will be lower and profits will be higher than if last-in, first-out method had
been used
B Production costs will be higher and profits will be lower than if last-in, first-out method had
been used incorrect as material costs which are lower, reduce cost
C Production costs will be lower and profits will be lower than last-in, first-out method had
been used incorrect as lower costs lead to higher profit.
D Production costs will be higher and profits will be higher than if last-in, first-out method
had been used incorrect as material costs which are lower, reduce cost
3. If FIFO rather than LIFO was used when material prices are failing, which of the following
combinations would be correct?
Production costs Profits
A will be lower will be higher
B will be higher will be lower
C will be lower will be lower
D will be higher will be higher
4. If a company wanted to ensure that its cost of production included the most recent cost for
material, it would use
A Standard cost C Weighted average cost
B Firs-in, first-out (FIFO) D Last-in, first-out (LIFO)
5. Which of the following is the underlying principle of the last-in, first-out (LIFO) method of
pricing material issues?
A The last materials received will be the first to be issued to production
B The first materials issued will be priced at the cost of the most recently received materials
C The first materials issued will be priced at the cost of the earliest goods still in stock
D The last materials received will be the last to be issued
6. At a time of constantly increasing prices which of the following material pricing methods will
result in the lowest production costs?
A First-in, first-out C Periodic weighted average cost
B Last-in, first-out D Weighted average cost
7. The following statements relating to raw material pricing in a situation where raw material
prices are rising consistently.
1 Production costs will be lower using weighted average pricing rather than LIFO
2 Profit will be higher using LIFO pricing rather than FIFO Production cost Profit
3 Stock values will be lower using FIFO pricing rather than weighted average. FIFO > AVCO
Are the statements true or false?
A Statement 1 is true but Statement 2 and 3 are false
B Statements 1 and 2 are true but Statement 3 is false
C Statements 1 and 3 are true but Statement 2 is false
D Statements 2 and 3 are true but Statement 1 is false
8. If the firs-in-first-out method of pricing is used what us the value of the issue on Day 7?
A $350 C $395 60u x $5.00 = $300
B $355 D $420 10u x $5.50 = $55
$355
9. If the last-in-first-out method of pricing is used what is the value of the issue on Day 7?
A $350 C $410 50u x $6.00 = $300
B $395 D $420 20u x $5.50 = $110
$410
10. A company orders a particular raw material in order quantities of 250 units. No safety stock is
held, the stockholding cost is $3 per unit per annum and the annual demand is 2,500 units.
What is the total annual stockholding cost of the material? = H x Q/2
A $375 C $3,750 = $3/u x 250u/2u
B $750 D $7,500 = $375
11. Wellington’s closing stock at 31 July of 400 units valued, using a LIFO flow of costs, at $10,000.
12. What would be the stock valuation at 31 August on a FIFO basis, to the nearest $?
A $22,200 C $22,500
B $15,000 D $18,000
Aug In Out Balance
12 4000 x $5 4000 x $5
15 3900 x $5 100 x $5
19 1200 x $6 100 x $5
1200 x $6
21 100 x $5 200 x $6
1000 x $6
24 2800 x $7.5 200 x $6
2800 x $7.5
13. What would be the closing stock valuation at 31 August 20x9, on a weighted average cost
basis to the nearest $?
A $18,075 C $18,500
B $22,185 D $22,046
Aug In Out Balance
12 4000 x $5 4000 x $5
15 3900 x $5 100 x $5
19 1200 x $6 100 x $5 = $500
1200 x $6 = $7200
Cost per unit $5.92
21 1100 x $5.92 200 x $5.92 = $1184
24 2800 x $7.5 200 x $5.92 = $1184
2800 x $7.5 = 21000
14. If FIFO stock valuation method were used, the value of stocks at the month end would be
A $1,000 C $1,100
C $1,200 D $1,400
Date In Out Balance
5 300 x $4.50 200 x $5.00
300 x $4.50
7 200 x $5.00 100 x $4.50
200 x $4.50
12 100 x $6.00 100 x $4.50
100 x $6.00
22 400 x $5.50 100 x $4.50
100 x $6.00
400 x $5.50
23 100 x $4.50 200 x $5.50
100 x $6.00
200 x $5.50
29 200 x $7.00 200 x $5.50
200 x $7.00
30 200 x $5.50 200 x $7.00
15. If LIFO stock valuation were used, the cost of issued of the ratchets issued in the month:
A $5,150 C $5,350
B $5,450 D $5,550
Date In Out Balance
5 300 x $4.50 200 x $5.00
300 x $4.50
7 300 x $4.50 100 x $5.00
100 x $5.00
12 100 x $6.00 100 x $5.00
100 x $6.00
22 400 x $5.50 100 x $5.00
100 x $6.00
400 x $5.50
23 400 x $5.50 100 x $5.00
100 x $6.00
29 200 x $7.00 100 x $5.00
100 x $6.00
200 x $7.00
30 200 x $7.00 100 x $5.00
100 x $6.00
16. The order quantity of a raw material is 2,000 kg. Safety stock of 1,200 kg is held. The
stockholding cost of the raw material is $1.20 per kg per annum.
What is the total annual stockholding cost of the raw material? = H x (Q/2 + safety stock)
A $1,200 = $1.20/kg x (2,000kg/2 + 1200kg)
B $1,920 = $2640
C $2,640
D $3,840
70 x $5.375 = $376.25
1. Profit will be lower using FIFO Production cost Profit rather than LIFO Production cost Profit.
2. Production costs will be higher using weighted average pricing rather than FIFO.
Are the above statements true or false in a situation where raw material prices are rising
consistently over time?
Statement 1 Statement 2
A False False
B False True
C True False
D True True
22. The following documents are used within a cost accounting system:
(i) invoice from supplier
(ii) purchase order
(iii) purchase requisition
(iv) stores requisition
Which TWO of the documents are matched with the goods received note in the buying
process?
A (i) and (ii)
B (i) and (iv)
C (ii) and (iii)
D (iii) and (iv)
23. What is the purpose of calculating an economic order quantity (EOQ) for a raw material?
A To minimise the stockholding quantity of the material
B To minimise the stockholding costs of the material
C To minimise the total cost of purchasing and storing the material
D To enable the reorder level of the material to be established
24. The following documents are used in accounting for raw materials:
(i) Goods received note
(ii) Materials returned note
(iii) Materials requisition note
(iv) Delivery note
Which of the documents may be used to record raw materials sent back to stores from
production?
A (i) and (ii)
B (i) and (iv)
C (ii) only
D (ii) and (iii)
25. Material M is used by a manufacturer. Stock of Material M at 1 May was valued at a cost of
$3,302 (260 kg at $12.70 per kg). 500 kg were purchased on 7 May for $6,500. 410 kg of
Material M were used in production during the month. The LIFO method is applied at the
end of each month. 410 kgs x $13 = $5330
What is the cost accounting entry for the issues of Material M during the month?
Debit Credit
A Material stock $5,252 Work-in-progress $5,252
B Work-in-progress $5,252 Material stock $5,252
C Material stock $5,330 Work-in-progress $5,330
D Work-in-progress $5,330 Material stock $5,330
27. The following information relates to a raw material stock item: 2DO
Economic order quantity 800 units (established using the formula )
H
Demand 12,000 units per annum
Cost of holding stock $1.50 per unit per annum
What is the cost of placing an order?
A $27 800 = 2 x 12000u x O
B $40 $1.50/u
C $71 = $40
D $80
29. Wastage of a raw material during a manufacturing process is 20% of input quantity.
What input quantity of raw material is required per kg of output?
A 0.8 kg input x kgs
B 1.2 kg wastage 20% of x kgs
C 1.25 kg output 80% of x kgs
D 1.33 kg what’s the input quantity if output is 1 kg?
30. In the context of stock control what is the maximum stock control level?
A The level below which stock should not fall if usage is at the maximum expected
B The level below which stock should not fall if average usage occurs
C The level that stock should not exceed if usage is at the minimum expected
D The level that stock should not exceed if average usage occurs
31. The inventory record of a raw material has the following details for a week:
Day Cost ($ per unit) Receipts (units) Issues (units)
2 260 18
3 270 12
4 10
6 14
Prepared by Jessy Chong 张愫芯 35
CAT – Intermediate Level T4 – Accounting For Costs
The first-in first-out (FIFO) method is used for pricing issues. There was no raw material at the
start of Day 1.
Which was the value of the inventory on Day 5?
A $5,200
B $5,220
C $5,320
D $5,400
Date In Out Balance
2 18 x $260 18 x $260
3 12 x $270 18 x $260
12 x $270
4 10 x $260 8 x $260
12 x $270
6 8 x $260 6 x $270
6 x $270
32. Average usage of a raw material is 200 kg per day, the average ordering lead time is five
days, the reorder level is 1,600 kg and the reorder quantity is 2,800 kg.
What is the average raw material inventory?
A 800 kg
B 1,400 kg
C 1,700 kg
D 2,000 kg
The maximum level = Reorder level + reorder quantity – (min. usage x min. lead time) cant used because insufficient info
The minimum level = Reorder level – (avg. usage x avg. lead time)
= 1600kgs – (200kgs x 5days)
= 600kgs (also known as SAFETY STOCK)
(a) Calculate the value of each issue of Material MQ, and the value of closing stock on 31
May 2001, if the company had used the weighted average method for pricing stock
issue. (Note: The average stock value should be calculated after each receipt.)
Date In Out Balance
12/6 100 x $9 100 x $9
18/6 50 x $9 = $450 50 x $9
30/11 80 x $12.25 50 x $9.00 = $450
80 x $12.25 = $980
Cost per unit $11
20/2 40 x $11 = $440 90 x $11
30/3 50 x $13.80 90 x $11 = $990
50 x $13.80 = $690
Closing $ 1680
(b) For the next financial year, ending on 31 May 2012, the company expects to purchase
500 units(D) of Material XY. The material will be used at an even rate throughout the year.
The supplier has agreed to supply all the units at a fixed price of $16 per unit(P). Ordering
costs for the material for next year will be $50(O) per order and stock-holding costs will
be $3 per unit(H) per annum.
Prepare a table, with columns for ordering costs and stock holding costs.
Determine the Economic Order Quantity if material can only be purchased in the
sizes of 100, 250 or 500.
Order level (u) 100 250 500
Total Ordering costs $50 x 500/100 $50 x 500/250 $50 x 500/500
O x D/Q $250 $100 $50
Total Holding costs $3 x 100/2 $3 x 250/2 $3 x 500/2
H x Q/2 $150 $375 $750
Total Stock costs $400 $475 $800
Calculate the Economic Order Quantity (EOQ) using the EOQ formula and
compare this with the answer to part (b).
EOQ = 2CoD
Ch
Where Co = Cost of placing an order, D = annual demand and Ch = Holding costs per unit per year
EOQ = 2 x 500u x $50
$3/u
= 129 units
(d) Name 4 methods of pricing stock issued, other than the weighted average method used
in part (a) above.
(Answer: FIFO, LIFO, Standard Cost and Replacement Cost)
(a) Calculate separately the cost of each of the six issued to production on the stock card
using the First in First out (FIFO) basis, and the value of the closing in December 2018.
(b) Calculate separately the cost of each of the six issues to production on the above stock
card using the Last in First out (LIFO) basis, and the value of the closing stock in
December 2018.
(Answer: $1045, $150, $200, $150, $51.20, $101.20, $353)
(c) Calculate separately the cost of each of the six issues to production on the stock card
using the Weighted Average basis, and the value of the closing stock in December 2018.
Date Details Receipts Issues Balance
Qty Unit Value Qty Unit Value Qty Unit Value
Price ($) ($) Price ($) ($) Price ($)
($)
1 Jan Balance b/f 200 5.00 1,000.00 200 5.00 1,000.00
12 Feb Receipt 200 5.10 1,020.00 200 5.00 1,000.00
200 5.10 1,020.00
400 5.05 2,020.00
20 Feb Issue 250 5.05 1262.50 150 5.05 757.50
12 Apr Issue 30 5.05 151.50 120 5.05 606.00
2 May Issue 40 5.05 202.00 80 5.05 404.00
13 May Issue 30 5.05 151.50 50 5.05 252.50
12 Oct Receipt 20 5.12 102.40 50 5.05 252.50
20 5.12 102.40
70 5.07 354.90
19 Nov Issue 10 5.07 50.70 60 5.07 304.20
21 Nov Issue 20 5.07 101.40 40 5.07 202.80
12 Dec Receipt 30 5.10 153.00 40 5.07 202.80
30 5.10 153.00
(d) If a company chooses to use the First in First out Method (FIFO) at a time when material
purchases prices are rising, what effect will this have on:
(i) Production costs
(ii) Closing stock valuations
Answer (d)
(i) If a company is issuing materials to production using the FIFO basis at a time when material prices are
increasing, this will tend to lower the material cost element of production in relation to its current market price.
(ii) If a company is issuing materials to production using the FIFO basis, when material prices are increasing this will
tend to mean that closing stock valuations will be reasonably close to current market prices.
Calculate separately the value of each of the three issues using the last-in, first-out (LIFO)
method and calculate the value of the closing on 17 May 2012
Date In Out Balance
01 Jun 11 100 x $10.50 100 x $10.50
03 Jul 11 50 x $11.00 100 x $10.50
50 x $11.00
10 Oct 11 50 x $11.00 75 x $10.50
25 x $10.50
02 Jan 12 10 x $10.50 65 x $10.50
Question 4
Shown below are the stock movements for Material X for the year ended 30 November 2012
Date Detail Units Unit price $ Value $
01 Jan 2012 Opening stock 100 10.00 1,000.00
28 Feb 2012 Receipt 600 10.50 6,300.00
03 May 2012 Issue 430
06 Jul 2012 Receipt 350 11.00 3,850.00
17 Sep 2012 Issue 550
28 Oct 2012 Receipt 600 11.40 6,840.00
11 Nov 2012 Issue 510
(a) Calculate separately the value of each of the three issues shown above if the company
had used the Last-in, First-out (LIFO) basis.
(Answer: $4515, $5935, $5814)
Date In Out Balance
01 Jan 2012 100 x $10.00
28 Feb 2012 600 x $10.50 100 x $10.00
600 x $10.50
03 May 2012 430 x $10.50 100 x $10.00
170 x $10.50
06 Jul 2012 350 x $11.00 100 x $10.00
170 x $10.50
350 x $11.00
17 Sep 2012 350 x $11.00 70 x $10.00
170 x $10.50
30 x $10.00
28 Oct 2012 600 x $11.40 70 x $10.00
600 x $11.40
11 Nov 2012 510 x $11.40 70 x $10.00
90 x $11.40
(b) Calculate separately the value of each of the three issues shown above if the company
had used the First-in, First-out (FIFO) basis.
Date In Out Balance
01 Jan 2012 100 x $10.00
28 Feb 2012 600 x $10.50 100 x $10.00
600 x $10.50
03 May 2012 100 x $10.00 270 x $10.50
330 x $10.50
06 Jul 2012 350 x $11.00 270 x $10.50
350 x $11.00
17 Sep 2012 350 x $11.00 70 x $10.50
200 x $10.50
28 Oct 2012 600 x $11.40 70 x $10.50
600 x $11.40
11 Nov 2012 70 x $10.50 160 x $11.40
440 x $11.40
When stock is physically counted the quantities counted may differ from the quantities
on stock record cards.
Give three reasons that could cause such differences.
(Answer: genuine mistakes in handling and recording inventory movements, theft and wastage)
Question 5: Material Q
A company expects to use 1,000 kilos (D) of Material Q next year. The material will be used at an
even rate throughout the year. It is expected that the cost of placing an order will be $50(O) per
order and the cost of holding one unit of material in stock will be $3(H) per annum.
The economic order quantity (EOQ) can be calculated by constructing a table of values.
Shown below is a partially completed ‘table of values’ for the orders sizes that are available for
Material Q.
Order size No of orders Average stock Ordering cost Holding costs Total ordering
Order size/2 DO/Q QH/2 & holding costs
(kilos) (Units) $ $ $
100 10 (a)50 (e)500 (i)150 (m)650
200 5 (b)100 (f)250 (j)300 (n)550
500 2 (c)250 (g)100 (k)750 (o)850
1,000 1 (d)500 (h)50 (l)1500 (p)1550
Calculate and tabulate the values of each of the letters (a) to (p) above that are needed to
complete the table correctly.
Note: From the figures calculated, we can see that the order quantity of 200 kilos results in the lowest cost.
Question 6: Material X
The information below shows the purchases and issues of Material X for the three month period
ended 30 November 2009.
Date Details Units $ per unit Value $
01 Sep 09 Balance b/f 10 12.00 120.00
02 Sep 09 Receipt 90 13.00 1,170.00
10 Oct 09 Issue 80
26 Oct 09 Receipt 180 14.00 2,520.00
12 Nov 09 Issue 60
22 Nov 09 Issue 80
24 Nov 09 Receipt 60 14.51 870.60
28 Nov 09 Issue 60
(b) If the average cost method was used (where the average cost is recalculated upon
each receipt) calculate
(i) The value of EACH of the four issues
(ii) The value of the closing stock on 28 November 2009
Date In Out Balance
01 Sep 09 10 x $12
02 Sep 09 90 x $13 10 x $12 = $120
90 x $13 = $1170
Cost per unit $12.90
10 Oct 09 80 x $12.90 20 x $12.90
26 Oct 09 180 x $14 20 x $12.90
180 x $14
Cost per unit $13.89
12 Nov 09 60 x $13.89 140 x $13.89
22 Nov 09 80 x $13.89 60 x $13.89
24 Nov 09 60 x $14.51 60 x $13.89
60 x $14.51
Cost per unit $14.20
28 Nov 09 60 x $14.20 60 x $14.20
For both parts (a) and (b) all values should be shown in $’s and cents.
Note: Stock cards are not required, but may be produced if this is of assistance in answering the questions.
Illustration 1
Kelvin works as an operator in a factory. Normal working time is 8-hour day for 5 days week.
Kelvin worked a total 58 hours in week 3. Basic rate is $8 per hour. Overtime premium is paid at ½
of basic.
Illustration 2
Andrew works as an operator in a factory. Normal working is 9-hour day for 6 days week.
Andrew worked a total 62 hours in week 8. Basic rate is $10 per hour. Overtime pay is at 1.75 of
basic.
Calculate the total labour pay to Andrew:
Normal Time Basic (9hrs x 6days x $10/hr) $540
Overtime Pay (8hrs x $10/hr x 1.75) $140
TOTAL LABOUR PAY $680
Illustration 3
A worker worked for 2 weeks. He is supposed to work 35 basic hours each week. Details of his
work are:
Week Hours worked Basic rate per hour Overtime premium
1 35 $6.00 $2.00
2 42 $6.00 $2.00
Calculate his total wages for the weeks of work.
Week 1:
Normal Time Basic (35hrs x $6/hr) $210
Week 2:
Normal Time Basic (35hrs x $6/hr) $210
Overtime Pay (7hrs x $8/hr) $156
TOTAL LABOUR PAY $366
OT Pay (加班费) = Basic Rate $6 + OT Premium $2
Still remember how to classify it? Direct or Indirect?
Illustration 4
SesameStreet & Co employs 20 direct production staff in its manufacturing department. The
normal operating hours for all employees is 36 hours (normal working hours) per week. The staffs are
paid a basic rate of $4.00 per hour. Overtime hours are paid at the basic rate + 60% (OT Pay$6.4 =
$4 x 1.6). During a particular week, all employees worked for 45 hours (OT 9 hours).
Compute the total labour cost incurred by SesameStreet & Co for the week.
Illustration 5
Company B currently employs 4 production operatives. Each employee works for 40 hours (Total
normal hours worked is 160) per week and is paid $6.00 per hour. Overtime premium is paid at a rate
of 50% of the basic rate.
All the production operatives are used to make Product Y, for which there is a standard time of
two labour hours.
For production quantities of 90 units, 100 units and 110 units respectively calculate the following
budgeted figures:
Units 90 100 110
Total labour needed @ 2hr/u 180hrs 200hrs 220hrs
Total basic Pay @ $6/hr $1080 $1200 $1320
Total overtime premium @ $6/hr x 50% $60 $120 $180
Total labour cost $1140 $1320 $1500
Average cost per unit ( to the nearest cents) $12.67 $13.20 $13.64
Note: Normal time 160 hrs
The company is proposing to change the existing remuneration method to a new scheme.
Under the new scheme each production operative will be paid $6.10 per hour for all hours
worked. There will be no overtime premium, but each worker will receive $2.50 for each unit
produced in excess of 90 units.
For weekly production quantities of 90 units, 100 units and 110 units, calculate the cost per unit
(to the nearest penny).
Units 90 100 110
Total labour needed @ 2hr/u 180hrs 200hrs 220hrs
Total time Pay @ $6.10/hr $1098 $1220 $1342
Total output @ $2.50/u - $25 $50
Total labour cost $1098 $1245 $1392
Average cost per unit ( to the nearest cents) $12.20 $12.45 $12.65
Total cost and cost per unit are dropped in the new scheme!!
Illustration 6
Alvin is a assembly-operator in a factory. Alvin achieved the following outputs:-
Illustration 7
Sonia works in a factory. Her duty is to pack bottle drinks into plastic container.
The factory operates a differential piecework scheme as follows for good bottles packed:-
Up to 100 bottles a day 15 cent/unit
101 – 150 bottles a day 18 cent/unit
151 – 200 bottles a day 21 cent/unit
201 bottles and above 25 cent/unit
Following are the results achieved by Sonia for the past 3 days:
Bottles handled Broken bottles
Monday 165 18
Tuesday 180 22
Wednesday 220 15
Calculate the gross wages for Sonia for the each 3 days and in total.
165 – 18 = 147 180 – 22 = 158 220 – 15 = 205
First 100 units @ $0.15/u 100 x $0.15 = $15.00 100 x $0.15 = $15.00 100 x $0.15 = $15.00
Next 50 units @ $0.18/u 47 x $0.18 = $8.46 50 x $0.18 = $9.00 50 x $0.18 = $9.00
Next 50 units @ $0.21/u 8 x $0.21 = $1.68 50 x $0.21 = $ $10.50
Next >201 units @ $0.25/u 5 x $0.25 = $1.25
TOTAL $23.46 $25.68 $35.75
Illustration 8
A company operates a piecework scheme with a guaranteed earning as follows:-
Up to 50 units $0.70 per unit
51 – 80 units $0.80 per unit
81 and above $0.90 per unit
All workers are guaranteed a pay of $50 per day irregardless of output achieved.
Ricky Vicky Ticky
Production 68 units 75 units 62 units
Calculate the gross wages for each labour.
Ricky Vicky Ticky
First 50u @ $0.70/u 50 x $0.70 = $35 50 x $0.70 = $35 50 x $0.70 = $35
Next 30u @ $0.80/u 18 x $0.80 = $14.40 25 x $0.80 = $20 12 x $0.80 = $9.60
>81u @ $0.90/u
Day earning $49.40 $55 $44.60
Vs Vs Vs Vs
Guaranteed pay $50 $50 $50
$50 $55 $50
Illustration 9
Co AHBOY operates a piecework scheme to pays its staff at $0.20 for each unit of good output
produced.
However, the company guarantees that every member of staff will receive at least $18 per day.
Shown below is the number of units produced by BEARD, one of the employees, during a recent
week:
Day Mon Tues Wed Thurs Fri
Units produced 94 77 83 65 96
Units rejected 4 7 8 5 6
Illustration 10
The following information is available:
Normal working day 8 hours
Guaranteed rate of pay (on time basis) $5.5 per hour
Standard time allowed producing 1 unit 3 minutes
Piecework price $0.1 per standard minute
Calculate earning based on piecework, where earning are guaranteed at 80% of time based
pay.
80 units 120 units 210 units
Piecework pay ($0.1/min x 3 min) $24.00 $36.00 $63.00
Guaranteed pay ($5.5/hr x 8hr/day x 80%) $35.20 $35.20 $35.20
$35.20 $36.00 $63.00
Illustration 11
LiewCF Ltd is a book printer. All books are required to be wrapped before being distributed to
stores for sales. Wrapping 1 book will require 2 minutes. Calculate the bonus payable to Kenny if
he wrapped 280 books in an 8-hour-day. Kenny is paid an hourly rate of $4/hour. LiewCF Ltd
operates a bonus scheme payable on time saved using the following formula.
Illustration 12
A factory manufactures two products, namely BR and JX which require a standard labour time
per unit of 20 minutes and 45 minutes respectively.
Two categories of workers are involved in the production of BR and JX. The labour records for
week 10 are given below:
Categories No of Employees Rate per hour Total actual hours worked
Skilled 30 $8 1380
Unskilled 50 $5 2200
The normal working week is 40 hours; overtime is paid at a premium of 50% of the normal hourly
rate. Calculate the total payroll showing the basic pay and overtime premium.
Illustration 13
Based on the data below, you are required to calculate the remuneration of each employee,
as determined by each of the following methods:
(i) Hourly rate
(ii) Basic piece rate
(iii) Individual bonus scheme, where employee receives a bonus in proportion of the time
saved to the time allowed
Name of employee P M R
Units produced 270 200 220
Time allowed in minutes per unit 10 15 12
Time taken in hours 40 38 36
$ $ $
Rate per hour 1.25 1.05 1.20
Rate per unit 0.20 0.25 0.24
(iii) Bonus
Employee P M R
Units produced 270 200 220
Hr/u 10/60 15/60 12/60
Time Allowed 45 50 44
Time Taken 40 38 36
Time Saved 5 12 8
Bonus 40 x 5 x $1.25 = $5.56 38 x 12 x $1.05 = $9.58 36 x 8 x $1.20 = $7.85
Tt x Ts x $/hr 45 50 44
Ta
Illustration 14
Bossman Ltd assembles small packing cases. These are assembled in Department 7. The
operatives in the department are paid a basic $2.00 per hour for each hour worked, but may
also receive a bonus.
The standard time for the assembly of the packing cases is 20 per hour. Bonuses are calculated
by the following formulae:
Tt x Ts x $2.20
Ta
Where Tt = the total time taken, Ta = the total time allowed, Ts = the total time saved
The number of cases assembled and hours worked by one operative for the last week of
December, were as follows:
Day 1 2 3 4 5
Cases assembled 190 185 180 200 140
Time Allowed 9.5 9.25 9 10 7
Time Taken 8 8 7 8 6
Time Saved 1.5 1.25 2 2 1
Bonus 8 x1.5x$2.2 8 x1.25x$2.2 7 x 2 x$2.2 8 x 2 x$2.2 6 x 1 x$2.2
Tt x Ts x $/hr 9.5 9.25 9 10 7
Ta =$2.78 =$2.38 =$3.42 =$3.52 =$1.89
Hourly Rate $16.00 $16.00 $14.00 $16.00 $12.00
@$2/hr
Total $18.78 $18.38 $17.42 $19.52 $13.89
Illustration 15
a) Producing product A will require 20 minutes of skilled labour. In Econ System Ltd, 25 skilled
labours are employed. For the month of June, 10,500 units(AO) of Product A are produced.
Assuming that June 20 working days with 7 hours per day(Total hrs worked 3500 = 25 labours x 7hrs x
20days) and no overtime is worked; calculate the labour efficiency ratio for Econ System Ltd.
b) Assuming 1 labour hour skilled labour is paid at $20 per hour. Calculate the labour cost for
Econ System Ltd based on the labour efficiency you’d calculated in part (a).
Total labour cost
3500 hrs x $20/hr = $70,000
c) Calculate the additional labour costs for Econ System Ltd if the labour efficiency ratio is only
80%.
Efficiency Ratio (E) = 3500 hrs x 100% = 80%
Actual hrs
Actual hrs = 4375 hrs
Additional hrs worked = 875 hrs
Additional Labour cost = 875 hrs x $20/hr = $17500
Illustration 16
Tank Ltd budgets to produce 30,000 units of X during a budget period of 90,000 hours. During
that period, actual output produced were 31,000 units of X which took 96,000 hours to make.
Calculate the efficiency, capacity and volume ratios.
Budgeted output 30,000u Budgeted hours worked (B) 90,000 hrs Std hr/u = 3hr/u
Actual output 31,000u Actual hours worked (A) 96,000 hrs
Std hours for AO (S) 93,000 hrs
Illustration 17
HEEKC Ltd provided you the following information for the year 2009.
Employees at 1st Jan 2009 190
Employees at 31st Dec 2009 210
Employees resigned in 2009 35
Employees replaced 28
Employees newly recruited 27
Required: Compute the labour turnover rate for HEEKC using both methods above!
(W1) Average = Beginning + Ending = 190 + 210 = 200
2 2
[Better approach]
Labour turnover ratio = No. of employees left, subsequently replaced x 100
Average no. of employees
= 28 x 100% = 14%
200
[Acceptable approach]
Labour turnover ratio = No. of employees left x 100
Avg no. of employees
= 35 x 100% = 17.5%
200
Overtime, which is paid at 140% of basic rate, is usually worked in order to meet the factory’s
general requirements. However, 40% of the overtime hours of both direct and indirect workers in
the month were worked to meet the urgent request of a particular customer.
a) Calculate the gross wages paid to direct workers and to indirect workers in the month.
Direct Workers $
Basic Rate Pay (2640hrs – 180hrs) x $5/hr 12,300
(Total Hrs – OT Hrs)
OT Pay 180hrs x $5/hr x 1.4 1,260
Group Bonuses 2,840
Gross Wages 16,400
Employers’ NIC 1,460
Total Labour Costs 17,860
Indirect Workers $
Basic Rate Pay (940hrs -75hrs) x $4/hr 3,460
OT Pay 75hrs x $4/hr x 1.4 420
Group Bonuses 710
Gross Wages 4,590
Employers’ NIC 405
Total Labour Costs 4,995
b) Analyse the labour costs, showing the corresponding amount treated as direct labour cost
and indirect (overhead) labour cost.
Direct Workers $
Productive Time 2,515hrs x $5/hr 12,575
OT Premium 180hrs x 40% x $5/hr x 0.4 144
Indirect Workers
OT Premium 75hrs x 40% x $4/hr x 0.4 48
Total Direct Labour Costs 12,767
Direct Workers
Non-Productive Time: Machine Breakdown 85hrs x $5/hr 425
Waiting for work 40hrs x $5/hr 200
OT Premium 180hrs x 60% x $5/hr x 0.4 216
Group Bonuses 2,840
Employers’ NIC 1,460
Indirect Workers
Basic Rate Pay 940hrs x $4/hr 3,760
OT Pay 75hrs x 60% x $4/hr x 0.4 72
Group Bonuses 710
Employers’ NIC 405
Total Indirect Labour Costs 10,088
QUESTION 2: DEPARTMENT A
The following information relates to the wages paid to workers for a four-week period in a
factory department (Department A) where two products M & N are manufactured:
All workers are paid at hourly rates. Basic rates (gross) are $8.00 per hour for direct workers and
$6.00 per hour for indirect workers for a 40 hour week.
The department employs 24 direct workers and 9 indirect workers. Overtime is regularly worked
to meet general production requirements and is paid at a premium of 25% over basic rate for all
workers. Overtime hours in the four week period were 256 and 84 for direct and indirect workers
respectively.
Notes:
Direct Labour Hrs: Normal 24 workers x 4 weeks x 40hrs = 3,840 hrs
OT = 256 hrs
Indirect Hrs: Normal 9 workers x 4 weeks x 40hrs = 1,440 hrs
OT = 84 hrs
Production of the two products during the four week period was:
Product M – 9,640 units in 1,620 hours of direct workers’ time
Product N – 22,800 units in 2,270 hours of direct workers’ time
Idle Time = Normal 3,840 hrs + OT 256 hrs – production 3890 = 206 hrs
The balance of the direct workers’ time in the period was non-productive time.
(i) Calculate the gross wages, for the four week period in Department A, for both direct workers
and indirect workers.
Direct Labour
Basic Rate 3,840hrs x $8/hr $30,720
OT 256hrs x $8/hr x 1.25 $ 2,560
Idle Time 206hrs x $8/hr $ 1,648
Total $34,928
Indirect Labour
Basic Rate 1,440hrs x $6/hr $8,640
OT 84hrs x $6/hr x 1.25 $ 630
Total $9,270
(ii) Analyse Department A wages, showing detailed calculation of both direct and indirect
wages.
Direct Labour
Basic Rate: Normal 3,840hrs x $8/hr $30,720
: OT 256hrs x $8/hr $2,048
Total Direct wages $32,768
Direct Labour
OT Premium 256hrs x $8/hr x 0.25 $512
Idle Time $1,648
Indirect Labour
Basic Rate 1,440hrs x $6/hr $8,640
OT 84hrs x $6/hr x 1.25 $ 630
Total Indirect Wages $11,430
Production operatives are paid a basic wages of $3 per hour worked, but an additional 50%
premium will be paid for any overtime hours. The basic working week is 38 hours.
During the month ended 31 March 2011, there were 4 weeks of production and the company
employed 30 production operatives. No Overtime was worked during the month and all 30
operatives worked for the full 38 hours for each of the 4 weeks of production. During the month
456 units of Product X were made.
Notes:
Total normal working hours 30 operatives x 38hrs x 4 weeks 4560hrs
a) Calculate labour cost for a single unit of Product X made in the month ended 31 March 2011
Total labour costs 4560hrs x $3/hr $13,680
Labour cost per unit $13,680 ÷ 456 units $30/u
b) The information below relates to the hours worked by 3 production operatives during the
month ended 30 April 2011
Operative A : 140 basic hours and 17 hours overtime
Operative B : 150 basic hours and 22 hours overtime
Operative c : 120 basic hours and 20 hours overtime
Calculate separately the total wages earned by each of Operative A, B and C during the month
ended 30 April 2011.
Operatives A B C
Basic Rate @ $3/hr 420 450 360
OT @ $3/hr x 1.5 76.50 99 90
Total 496.50 549 450
c) The company is considering introducing a bonus scheme for next year. The details of the
scheme are as follows:
In order to calculate the bonus a standard production time of 10 hours is to be allowed for
each good unit of Product X. Rejected units does not qualify for the bonus. The bonus will be
calculated using the following formula:
Bonus = Time Saved x 50% basic rate per hour
Assume that the scheme was introduced and that in the month of January 2002 the
production staff worked for a total of 4,200 basic hours. During the month assume that 500
units of Product X were made, of which 50 units were rejected as faulty. The basic rate of
pay will remain at $3 per hour.
(i) Calculate the total basic wages that would be payable to the production operatives for
January.
4,200 hrs x $3/hr = $12,600
(ii) Calculate the total bonus that would be payable to the production staff for January
Time Allowed (500u-50u) x 10hrs/u 4,500hrs
Time Taken 4,200hrs
Time Saved 300hrs
(iii) Briefly explain why a company might have to increase the inspection of finished goods if a
bonus scheme is introduced.
• Increase in productivity however it will affect the quality of output.
d) Overtime premium could be treated as a direct labour cost or could be treated as part of
the overhead cost.
Explain the circumstances under which overtime premium would be treated as a direct
labour cost and those in which it would be treated as an overhead cost.
• OT is special requested by customer OT Premium Direct
• If OT is general and common OT Premium Indirect
Keysia Ltd manufactures 3 types of computer boards. Department Assembly is responsible for
the assembly of the keyboards and the operatives are paid on a piecework basis:
The piecework rate for the operatives is $0.50 per minute produced but this is not paid for any
keyboards that are rejected as being faulty.
The table below shows the number of keyboards of each type assembled by 3 operatives for
the last week of November year 2013.
Keyboard Type Operative 1 Operative 2 Operative 3
AB CD EF AB CD EF AB CD EF
Day 1 22 10 6 8 20 16 8 14 8
Day 2 21 11 6 18 16 16 8 13 8
Day 3 18 13 6 8 14 18 8 10 6
Day 4 20 9 6 20 10 0 8 12 8
Day 5 19 7 6 16 10 0 8 1 10
The total number of reject for each operative for the week were as follows:
Keyboard Type Operative 1 Operative 2 Operative 3
AB CD EF AB CD EF AB CD EF
Rejects 4 2 1 3 4 5 2 2 1
Calculate the total amount payable to each of the 3 operatives of Keysia Ltd under the
piecework scheme for the last week of November 2013.
Qualified 96 48 29 67 66 45 38 48 39
minutes 1152 720 522 804 990 810 456 720 702
Total minutes 2394 2604 1878
Total $1197 $1302 $939
Given below is the output for three operatives for the week ending 31 October 2011.
Operative A B C
Output (including rejects) 520 units 600 units 480 units
Rejects 19 units 62 units 10 units
(i) Calculate separately the earnings of each of operatives A, B and C for the week ending
31 October 2001.
QUESTION 6: COMPANY A
The following information relates to the output achieved by Company A for the year ended 31
October.
Staffs are paid on an hourly basis plus an annual bonus. During the year ended 31 October the
production staff actually worked 66,250 hours. The basic rate of pay throughout the year was
$4.10 per hour.
a) Calculate the total bonus earned by the production staff for the year ended 31 October 2012,
based on the above scheme.
b) On the assumption that the company employed 40 production staff for 50 weeks during the
year ended 31 October 2012, calculate the average weekly earnings for a single employee.
No overtime was worked.
QUESTION 7
A company manufactures a single product. Currently, the company employs a team of six
direct operatives who produce a total of 2,500 units of the product in a 40-hour week. The hourly
rate of pay for all operatives is $8.00.
In an effort to improve productivity, and thus to increase output in the normal 40-hour week, an
incentive scheme has been suggested. The scheme, which the six operatives have agreed to
trial over a 4-week period, provides for differential piecework payments in addition to a reduced
basic rate per hour. Details of the scheme are:
In the first week of the trial, total output was 3,080 units in the 40 hours worked.
Required:
(a) For the existing time rate payment system, calculate:
(i) The labour cost per unit, based on the current weekly output of 2,500 units;
(ii) the % change in the labour cost per unit if weekly output in the 40 hours worked could be
increased to 2,750 units.
% change in labour cost per unit (output 2,750 units per week):
$1,920 ÷ 2,750 units $0.698 per unit
Reduction in unit cost [($0.768 - $0.698) ÷ $0.768] x 100% 9.1%
(ii) The level of output in a 40 hour week at which total labour cost would be the same as
under the existing time rate payment system.
QUESTION 8
The following details relate to the labour in a production cost centre for a period:
Direct personnel Indirect personnel
Hourly rates of pay:
Basic $10.00 $7.00
Overtime $13.00 $9.10
Payroll hours:
Productive 310 118
Idle 18 4
–––– ––––
Total 328 122
–––– ––––
Additional information:
1. The basic rates of pay apply to a normal working week of 38 hours
2. There are eight direct personnel and three indirect personnel in the cost centre
3. Overtime is worked from time to time to meet the general requirements of production
4. Idle time is regarded as normal.
Required:
Calculate the total amounts:
(i) paid to the direct personnel and the indirect personnel respectively;
Direct Labour
Basic Paid (8staffs x 38hrs x $10/hr) $3,040
OT Paid (8 staffs x 4hrs x $13/hr) $416
Idle (18hrs x $10/hr) $180
Total $3636
Indirect Labour
Basic Paid (3staffs x 38hrs x $7/hr) $798.00
OT Paid (3 staffs x 6hrs x $9.10/hr) $163.80
Idle (4hrs x $7/hr) $28.00
Total $989.80
Direct Labour
OT: Premium (8 staffs x 4hrs x $3) $96.00
Idle $180.00
Indirect Labour
Basic Paid (3staffs x 38hrs x $7/hr) $798.00
OT Paid (3 staffs x 6hrs x $9.10/hr) $163.80
Idle (4hrs x $7/hr) $28.00
Total Indirect Labour Costs (POH) $1265.80
QUESTION
1. A company operates a piecework scheme to pay its staff. The staffs receive $0.20 for each
unit produced. However the company guarantees that every member of staff will receive at
least $15 per day.
Shown below is the number of units produced by Operator A during a recent week:
Day Mon Tues Wed Thurs Fri
Units produces 90 70 75 60 90
Basic Piece Rate @ $0.20 $18 $14 $15 $12 $18
Guarantees $15 $15 $15 $15 $15
Earning $18 $15 $15 $15 $18
Total = $18 + $15 + $15 + $15 + $18 = $81
What are Operator A’s earning for the week?
A $75.00 C $81.00
B $77.00 D $152.00
2. In setting the rate of pay for employees a company would have to consider which of the
following factors?
1 Current rate of pay
2 Rates of pay in similar industries in the same area
3 Absentee rates
4 National inflation rates
3. Which of the following statements is/are true about group bonus schemes?
(i) Group bonus schemes are appropriate when increased output depends on a number of
people all making extra effort
(ii) With a group bonus scheme, it is easier to award each individual’s performance
(iii) Non-production employees can be rewarded as part of a group incentive scheme
A (i) only C (i) and (iii) only
B (i) and (ii) only D All of them
A $33.60 C $65.60
B $60.80 D $84.00
Time Allowed 82u x 6min/60min 8.2hrs
Time Taken 7hrs
Time Saved 1.2hrs
7. An employee is paid on a piecework basis. The basis of the piecework scheme is as follows:
1 to 100 units - $0.20 per unit 100u x $0.20/u $20.00
101 to 200 units - $0.30 per unit 93u x $0.30/u $27.90
201 to 299 units - $0.40 per unit Total $47.90
Only the additional units quality for the higher rates. Rejected units do not qualify for
payment. During a particular day the employee produced 210 units of which 17 were
rejected as faulty. (210u -17u = 193u)
What did the employee earn for their day’s work?
A $47.90 C $57.90
B $54.00 D $63.00
Indirect Staff
Basic Paid 10 staffs x 44hrs x $5/hr $2200
OT Premium 10 staffs x 6hrs x $5/hr x 50% $150
Total $2650
10. A manufacturing firm has temporary production problems and overtime is being
worked(General OT only).
The amount of overtime premium contained in direct wages normally is classed as which
one of the following:
A Direct expenses
B Production overheads
C Direct labour cost
D administrative overheads
11. Gross wages incurred in department 1 June were $54,000. The wages analysis shows the
following summary breakdown of the gross pay:
12. A manufacturing firm is very busy and overtime is being worked (General OT only).
The amount of overtime premium contained in direct wages would normally be classed as:
A part of prime cost
B factory overheads
C direct labour cost
D administrative overheads
13. Employee A is a carpenter and normally works 36 hours per week. The standard rate of pay
is $3.60 per hour. A premium of 50% of the basic hourly rate is paid for all overtime hours
worked. During the last week of October, employee A worked for 42 hours.
14. A company makes a product for which the standard labour time is 2 hours per unit. The
budgeted production hours for a given week 820(Bhrs). During the week the production staffs
were able to produce 380 units (AO) of product. Staffs worked and were paid for 800 hours
(Ahrs). During the week 20 production hours were lost due to a shortage of material. (Std Hrs for
AO 760hrs = 2hrs x 380u) The efficiency ratio was therefore:
A 95.00% C 97.44%
B 95.12% D 97.50%
Efficiency ratio = Std hrs/Ahrs x 100%
= 760hrs/(800hrs – 20hrs) x 100% = 97.44%
15. What is the correct formula to calculate the labour efficiency ratio?
A (Standard time for actual production ÷ (actual hours worked) x 100
B (Actual hours worked ÷ (standard time for actual production) x 100
17. Guilt Trips Ltd budgets to make 50,000 units (BO) of output (in eight hours each) during a
budget period of 400,000 hours(Bhrs). Actual output during the period was 54,000 units(AO)
which took 480,000 hours(Ahrs) to make. The efficiency and capacity ratios are:
Efficiency ratio Capacity ratio
A 90% 83%
B 90% 120%
C 111% 83%
D 111% 120%
Std hrs for AO = 8hrs/u x 54,000u = 432,000hrs
Efficiency ratio = Std hrs/Ahrs x 100% = 432,000hrs/480,000hrs x 100% = 90%
Capacity ratio = Ahrs/Bhrs x 100% = 480,000hrs/400,000hrs x 100% = 120%
18. The following items are some of the costs incurred by a company:
(i) training of direct operatives
(ii) wages of distribution staff non production costs
(iii) normal idle time in the factory
(iv) productive time of direct operatives direct production costs
(v) sales personnel salaries non production costs
Which of the above items will usually be treated as production overhead costs?
A (i) and (ii) only
B (i) and (iii) only
C (i), (iii) and (iv) only
D (ii), (iv) and (v) only
19. A company pays direct operatives a basic wage of $8.50 per hour plus a productivity bonus.
The bonus is calculated as:
[(time allowed – time taken) x (basic rate per hour ÷ 3)]
The time allowed is 2.4 minutes per unit of output (Time Allowed 42.6hrs = 1065u x 2.4min/60min) . An
operative produced 1,065 units in a 37½(Time Taken) hour week. Time Saved 5.1hrs
What were the total earnings of the operative in the week?
A $318.75
B $333.20
C $340.40
D $362.10
21. Which of the following labour records may be used to allocate costs to the various cost units
in a factory?
(i) Employee record card
(ii) Attendance record card
(iii) Time sheet
(iv) Job card
23. The costs associated with labour turnover can be classified as ‘preventative’防止员工辞职费
costs or ‘replacement’ 替换员工费用costs.
Which of the following is a preventative cost?
A Provision of leisure facilities for employees
B Lower productivity of new employees
C Increased wastage of raw materials
D Training costs for new employees
Question 1
A company is preparing its budget for the year ended 31 December 2009. The company has
two production departments, Department L and Department M, and two service departments,
which are the storeroom and canteen.
The estimated overhead costs for the year ending 31 December 2009 are:
$
Factory rent 52,000
Factory premises insurance 6,700
Machinery depreciation 8,800
Machinery insurance 2,400
Security costs 6,200
Supervisors’ salaries 44,000
Storeroom costs 12,000
Canteen costs 15,600
Total 147,700
Department L Department M
Direct labour hours 25,000 31,200
(c) Calculate overhead absorption rates for Department L and Department M for the year
ended 31 December 2009, based on the labour hours. All figures should be calculated to
the nearest cents.
Department L M
Total POH 80,121 67,678
Direct labour hours 25,000 31,200
OAR (Total POH/DLHrs) $3.20/lhr $2.17/lhr
Do I need to remind you again? The OAR is calculated base on budgeted figures.
Question 2 QB Limited
QB Limited is a manufacturer of plastic sheeting. It manufactures only to customers’ specific
requests and does not carry any stock of ‘ready made’ sheeting. The only stocks it does hold in
its storeroom are raw materials from which the sheeting is produced.
The company has two production departments: cutting and finishing. It also has two service
departments: the stores and the canteen. These departments are located within a single
building.
The information provided below has been extracted from the company’s budget for the next
financial year.
Overhead budget for the year ended 30 June 2009 $
Factory rent (including storeroom and canteen) 220,000
Factory premises insurance (including storeroom and canteen) 11,000
Sundry expenses – cutting department 8,540
Sundry expenses – finishing department 4,150
Machinery insurance 3,900
Depreciation of factory plant and machinery 24,000
Finishing department materials 10,000
Indirect labour (including storeroom and canteen) 176,000
Administration salaries (see note below) 24,000
Sundry storeroom costs 13,370
Canteen materials and other costs 29,640
Total 524,600
Note: Administration salaries are to be apportioned equally to the cutting department, finishing department and
storeroom.
The company has also budgeted for the following levels of activity for the year ended 30 June
2009.
Department Labour hours Machine hours
Cutting 2,900 4,700
(b) Using suitable bases, re-apportion service department costs to the production
departments.
Departments Cutting Finishing Canteen Storeroom
OH allocated & apportioned 218,500 208,300 63,070 35,930
Re-apportionment
Canteen (no. of employees) 23,651 36,265 (63,070) 3,154
Storeroom (70:30) 27,359 11,725 - (39,084)
Total POH 269,510 223,290 - -
How to re-apportion the OH of service department?
Example:
Canteen of Dept L (no. of employees) = $63,070 x 30/80 = $23,651
Canteen of Dept M (no. of employees) = $63,070 x 46/80 = $36,265
Canteen of Dept Storeroom (no. of employees) = $63,070 x 4/80 = $3,154
Do not include the number of employees of canteen.
(c) If the cutting department absorbs overhead using a machine hour basis, and the
finishing department absorbs overhead using a labour hour basis, calculate the
overhead absorption rates for each of the two production departments for the year
ended 30 June 2009.
Departments Cutting Finishing
Total POH 269,510 223,290
Total Mhrs or Lhrs 4,700 4,200
OAR $57.34/mhr $53.16/lhr
Calculate the budgeted overhead absorption rates for each production department using the
following methods.
(a) A machine hour rate in the weaving department
(b) A direct labour hour rate on the proofing department
(c) Another suitable method in the finishing department
It may be assumed that the equipment maintenance department does not service the personnel services department.
All workings and assumptions should be clearly shown.
(DO NOT INCLUDE DIRECT COSTS)
Department Weaving Proofing Finishing Personnel Equipment
service maintenance
Indirect materials & wages 1,100 900 300 1,500 3,800
Power 5,200 1,000 200 100 800
Rent & rates (Floor area) 1,600 3,600 800 1,600 400
Factory admin & supervision (no. of employees) 2,400 4,000 1,600 400 1,600
Machine insurance (Gross BV of equipment) 1,600 400 400 - -
OH allocated & apportioned 11,900 9,900 3,300 3,600 6,600
Re-apportioned
Personnel Service (No. of employees) 900 1,500 600 (3,600) 600
Equipment maintenance (MHrs) 4,800 1,200 1,200 - (7,200)
Total POH 17,600 12,600 5,100 - -
MHrs/LHrs/LHrs 1,600,000 1,800,000 600,000 - -
OAR 0.011/lhr 0.007/lhr 0.0085/lhr
Question 2 (a)
Using the rates calculated in your answer to (c) above, estimate the amount of overhead to be
charged to job XY129 that would require the following labour and machine hours:
Department Labour hours Machine hours
Cutting 29 40
Finishing 30 6
Suggest why it is appropriate for the cutting department to use a machine hour basis to recover
its overhead and for the finishing department to use a labour hour basis.
Departments Cutting Finishing
OAR $57.34/mhr $53.16/lhr
AHrs/u 40mhrs 30lhrs
OH/u $2,293.60 $1,594.80
During period 3, actual results were as follows for an output level of 117,500 units
Department Casting Dressing Assembly
Production overheads $229,317 $182,875 $94,395
Production hours 7,950 7,280 6,696
(a) OH absorbed (OAR x AHrs) $238,500 $182,000 $100,440
QUESTIONS
1. A company has two production departments, Cutting and Finishing.
The budgeted overheads and operating hours for the two departments for next year are:
Cutting: $210,000 60,000 machine hours 4,000 labour hours
Finishing: $200,000 5,000 machine hours 14,000 labour hours
From the information given the pre-determined overhead absorption rates for the
departments should:
A both be based on machine hours
B both be based on labour hours
C be based on machine hours for the cutting department and labout hours for the finishing
department
D be based on labour hours for the cutting department and machine hours for the finishing
department
2. A company absorbs production overheads using a machine hour basis. In order to calculate
any over or under absorbed overheads which of the following would be needed, in
additional to the pre-determined machine hour rate?
A Budgeted overheads and actual overheads incurred
B Budgeted overheads and actual hours worked
C Actual overheads incurred and budgeted hours
D Actual overheads incurred and actual hours worked
Budgeted POH ÷ Budgeted Activity Level = OAR
OAR x Actual Activity Level = OH absorbed
OH absorbed ~ Actual OH incurred = Over/(under) absorbed
3. Which of the following are acceptable bases for absorbing production overheads?
1 direct labour hour
2 machine hours
3 as a percentage of prime cost
4 per unit
A method 1 and 2 only C method 1, 2, 3 or 4
B method 3 and 4 only D method 1, 2 or 3 only
It is also possible that this same item may relate to just one specific department.
If the item was charged specifically to a single department this would be an example of:
A Apportionment C Re-apportionment
B Allocation D Absorption
7. What is the term associated with charging a specific item of overhead cost to one particular
department?
A Absorption C Apportionment
B Allocation D Re-apportionment
8. A company is considering the following methods for apportioning heating and lighting costs
to its various departments:
1 The relative floor areas of departments
2 The relative cubic capacity (volume) of departments
3 The relative usage ascertained from meters
Which of the above would be acceptable?
A Method 1 and 2 only C Method 2 and 3 only
B Method 1 and 3 only D Method 1, 2 and 3
10. A company had the following budgeted and actual production overhead costs in its two
production cost centres, Machining and Assembly:
Budget Actual
Machining $210,000 $212,000
Assembly $136,000 $134,000
What statement is true?
A From the data available it is not possible to determine overhead over/under absorption
B Machining overheads were over-absorbed: Assembly overheads were under-absorbed
C Machining overhead were over-absorbed: Assembly overheads were over-absorbed
D Machining overhead were under-absorbed: Assembly overheads were over-absorbed
11. A method of dealing with overheads involves spreading common costs over cost centres on
the basis of benefit received.
This is known as
A Overhead absorption
B Overhead apportionment
C Overhead allocation
D Overhead analysis
12. The following extract of information is available concerning the four cost centres of EG
Limited.
Machining Finishing Packing Canteen
Number of direct employees 7 6 2 -
Number of indirect employees 3 2 1 4
Overhead allocated and apportioned $28,500 $18,300 $8,960 $8,400
Re-apportionment: Canteen (no. of Employees) $4,000 $3,200 $1,200 ($8,400)
Total POH $10,260
The overhead cost of the canteen if to be re-apportioned to the production cost centres on
the basis of the number of employees in each production cost centre.
After the re-apportionment, the total overhead cost of the packing department, to the
nearest $, will be
A $1,200 C $10,080
B $9,968 D $10,160
14. The production overhead of department D is absorbed using a machine hour rate.
Budgeted production overheads for the department were $280,000 and the actual machine
hours were 70,000. Production overheads were under absorbed by $9,400.
If actual production overheads were $295,000 what was the overhead absorption rate per
machine hour (to the nearest $)?
A $4.00 C $4.21
B $4.08 D $4.35
18. Based on the data given above, what is the amount of overhead under/over-absorbed?
A $2,550 under-absorbed C $2,550 over-absorbed
B $2,529 over-absorbed D $7,460 under-absorbed
OH absorbed = $17.50/Lhr x 7,928Lhr = $138,740
Actual OH incurred = $146,200
(Under) absorbed ($7,460)
20. The following production overhead costs relate to a production cost centre:
Budget $124,000 OH absorbed $125,200
Actual $126,740 Actual OH incurred $126,740
Absorbed $125,200 under absorbed ($1,540)
Which of the following statements is true?
A overheads were over-absorbed by $1,200
B overheads were over-absorbed by $1,540
C overheads were under-absorbed by $1,200
D overheads were under-absorbed by $1,540
21. Overheads are absorbed at a pre-determined rate based on direct labour hours. The
following additional information is available for a period:
Budget $164,000 overhead expenditure 10,000 direct labour hours
Actual $158,000 overhead expenditure 9,800 direct labour hours
OAR = Budget OH/dlhr = $164,000/10,000dlhr = $16.40/dlhr
OH absorbed = $16.40/dlhr x 9,800dlhr = $160,720
Actual OH incurred = $158,000
Over absorbed $ 2,720
What was the overhead over/under-absorption in the period?
A $2,720 over-absorbed
B $3,224 over-absorbed
C $3,280 under-absorbed
D $6,000 under-absorbed
22. A company uses absorption costing. In a period, 34,000 units of the company’s single
product were manufactured and 33,000 units were sold.
Consider the following two statements:
1. Fixed production overheads would be over-absorbed.
24. Machine hours are used to absorb overheads in a production cost centre. Overheads
allocated and apportioned to the cost centre are:
$
Allocated 13,122
Apportioned 7,920
Reapportioned from service cost centres 2,988
Total POH 24,030
216,000 units of product are manufactured at a rate of 120 units per machine hour.
What is the overhead absorption rate per machine hour (Total Mhrs = 216,000u/120u = 1800 Mhrs)?
OAR = $24,030/1,800Mhrs = 13.35/Mhrs
A $7.29
B $11.13
C $11.69
D $13.35
Question1 KP Ltd
KP Ltd is security printers and print both bank notes and postage stamps for a number of
government agencies and post offices.
The company has 4 production cost centres (Paper Cutting, Printing, Trimming and Packing).
The Cutting and Printing cost centres are highly automated, but the Trimming and packing cost
centres are labour intensive. It also has 3 service cost cenntres (Stores, Maintenance and Quality
Control).
The company budget for overheads for next year is as follows:
KP Ltd: Factory Overhead Budget for the year to 31 December 2009
Expense $
Factory rental 85,000
Electricity 30,530
Depreciation of plant and equipment 57,000
Salaries – stores personnel 60,000
Salaries – maintenance personnel 80,000
Salaries – quality control personnel 50,000
Prepared by Jessy Chong 张愫芯 69
CAT – Intermediate Level T4 – Accounting For Costs
Factory administration salaries are apportioned to all departments on the basis of the number of
staff employed by those departments.
Percentage of Service Cost Centre Time Spent on other Cost Centres
Cost Centre Paper Printing Trimming Packing Stores Maintenance Q.
Cutting Control
% % % % % % %
Stores 60 15 - 20 - 5 -
Maintenance 20 40 25 15 - - -
Quality Control 35 35 15 10 - 5 -
(a) Prepare an overhead distribution sheet for the production overheads for KP Ltd for the year
ended 31 December 2009.
Cost Centre Paper Printing Trimming Packing Stores Maintenance Quality
Cutting Control
Factory Rental (Floor Area) 15,000 45,000 5,000 10,000 5,000 2,500 2,500
Electricity (Power usage) 8,600 19,350 860 430 430 430 430
Depreciation of P&M (value of P&E) 15,000 36,000 1,500 3,000 750 750 -
Salaries - - - - 60,000 80,000 50,000
Administration (no of employees) 880 1,760 7,039 3,520 352 352 175
Factory Insurance (Floor Area) 2,040 6,120 680 1,360 680 340 340
P&M Insurance (value of P&E) 4,000 9,600 400 800 200 200 -
Cleaning (Floor Area) 2,100 6,300 700 1,400 700 350 350
OH allocated & apportioned 47,620 124,130 16,179 20,510 68,112 84,922 53,795
Re-apportioned
Quality Control (35:35:15:10:0:5:0) 18,828 18,828 8,069 5,380 - 2,690 (53,795)
Stores (60:15:0:20:0:5:0) 40,867 10,217 - 13,622 (68,112) 3,406 -
Maintenance (20:40:25:15:0:0:0) 18,204 36,407 22,755 13,653 - (91,018) -
Total POH 125,519 189,582 47,003 53,165 - - -
(c) The company has received an order (number XY123) to print some postage stamps
during year 2009. They have estimated that the labour and machine hours for this job will
be:
Prepared by Jessy Chong 张愫芯 70
CAT – Intermediate Level T4 – Accounting For Costs
Assembly department
Total overheads ($) Number of labour hours
338,875 14,500
347,625 15,500
356,375 16,500
(a) Calculate the variable overheads absorption rate per labour hour
VOAR/lhr = $356,375 - $338,875 = $8.75/lhr
16,500 – 14,500
(d) Calculate the amount of under/over-recovery of overheads if the actual labour hours
were 15,850 and actual overheads were $355,050
OH absorbed : VOH ($8.75/lhr x 15,580Lhrs) = $136,325
: FOH = $212,000 $348,325
Actual OH incurred $355,050
Under absorbed $ 6,725
(e) State the arguments for and against using the departmental absorption rates as
opposed to a single factory-wide rate.
Answer
The arguments for using departmental absorption rates as opposed to a single a factory-wide rate are:
Costing is more accurate since the accretion of overheads is dependent upon the departments a product passes
through.
Variance analysis and cost control is easier
Valuation of stocks and work-in-progress are easier and more accurate
Awareness of costs and the control thereof is enhanced
The arguments against using the departmental absorption rates as opposed to a single factory-wide rate are:
Setting up and monitoring the absorption rates can be time-consuming and expensive.
May be unnecessary where departments are similar
May be misleading product costs if absorption rates are not carefully set and constantly monitored.
Question 3
A company has two production departments and two service departments. Production
overheads for the year ending 31 December 2009 are expected to be as follows:
Prepared by Jessy Chong 张愫芯 71
CAT – Intermediate Level T4 – Accounting For Costs
$
Rent and rates 15,200
Lighting and heating 12,160
Depreciation of machinery 14,000
Insurance of machinery 3,500
Supervisor’s salary 15,200
Building insurance 7,600
$67,660
The following information is also available:
Production departments Service departments
Machining Finishing Stores Maintenance Total
Floor area (square metres) 400 300 100 250 950
Number of production staff 9 7 - - 16
Value of machinery ($’000) 15 10 4 6 35
Direct Labour Hours 16,416 12,768 - - 29,184
Each of the production staff is expected to work 38 hours per week for 48 weeks during 2009.
(a) Prepare an overhead apportionment schedule for the year ended 31 December 2009
clearly showing the basis of apportionment for each overhead.
Departments Machining Finishing Stores Maintenance
Rents and rates (floor area) 6,400 4,800 1,600 4,000
Lighting &heating (floor area) 5,120 3,840 1,280 3,200
Depreciation of machinery (value of machinery) 6,000 4,000 1,600 2,400
Insurance of machinery (value of machinery) 1,500 1,000 400 600
Supervisor’s salary (no. of production staff) 8,550 6,650 - -
Building insurance (floor area) 3,200 2,400 800 2,000
OH allocated & apportioned 30,770 22,690 5,680 12,200
(c) Calculate overhead absorption rates for the Machining and Finishing Departments for the
year ending 31 December 2009 based on the productive labour hours for those
departments. (Answers should be to the nearest cents)
Departments Machining Finishing
Total POH 40,278 31,062
LHrs 16,416 12,768
OAR $2.45/lhr $2.43/lhr
However, the remaining overheads, as detailed below still have to be apportioned to each of
the departments:
Electricity $24,000
Indirect labour $36,000
Rent $64,000
Machine maintenance $12,000
(a) Prepare an overhead apportionment schedule. The schedule should include the overheads
already allocated and the overheads that still require apportionment.
Departments A B X Y
Allocated overheads 141,345 82,655 32,000 24,000
Electricity (Floor area) (machinery operating hrs) 10,500 9,750 2,250 1,500
Indirect labour (no. of indirect employees) 12,000 12,000 6,000 6,000
Rent (floor area) 28,000 26,000 6,000 4,000
Machine maintenance (machine operating hours) 6,000 5,000 750 250
OH allocated & apportioned 197,845 135,405 47,000 35,750
The re-apportionment of service department overheads has not yet been done. Neither has the
calculation of overhead absorption rates.
The following additional budgeted information is available as basis for undertaking these tasks.
Department Machining Finishing Stores Maintenance Canteen
Number of employees 40 10 5 5 4
Maintenance hours 500 300 50
Material requisitions 300 200
Machine hours 20,000
Labour hours 4,000
(a) Re-apportion the service departments’ overheads to the production departments using
appropriate bases.
Department Machining Finishing Stores Maintenance Canteen
Allocated & apportioned overheads $28,000 $16,000 $4,000 $8,000 $6,000
Re-apportioned
Canteen (no. of employees) $4,000 $1,000 $500 $500 ($6,000)
Maintenance (maintenance hours) $5,000 $3,000 $500 ($8,500)
Stores (material requisition) $3,000 $2,000 ($5,000) - -
Total POH $40,000 $22,000 - - -
(b) Calculate overhead absorption rates for the two production departments for next year.
Department Machining Finishing
Total POH $40,000 $22,000
Mhrs/Lhrs 20,000 4,000
OAR $2/Mhr $5.50/Lhr
Question 6
Overheads allocated, apportioned and re-apportioned to the two production cost centres in a
factory for a period were:
Overheads are absorbed using predetermined rates. A machine hour rate is used in Production
Cost Centre X and a direct labour hour rate in Production Cost Centre Y. Machine and direct
labour activity in each production cost centre is:
Required:
Calculate for each production cost centre for the period:
(i) The predetermined production overhead absorption rate; Budgeted POH÷ Budgeted Activity Level
(ii) The production overheads absorbed; OAR x Actual Activity Level
(iii) The over/under absorption of production overhead. OH absorbed ~ Actual OH incurred
Production Cost Centre X Y
Budgeted POH $161,820 $97,110
Budgeted Mhrs/Lhrs 8,700 Mhrs 8,300 Lhrs
OAR $18.60/Mhr $11.70/Lhr
Question 7
There are two production cost centres (P1 and P2) and two service cost centres (Materials Store
and Employee Facilities) in a factory. Estimated overhead costs for the factory for a period,
requiring apportionment to cost centres, are:
$
Buildings depreciation and insurance 42,000
Management salaries 27,000
Power to operate machinery 12,600
Other utilities 9,400
Further information:
Cost Centre
P1 P2 Materials Employee Total
Store Facilities
Floor area (m²) 4,560 5,640 720 1,080 12,000
Number of employees 18 24 6 6 54
Share of other utilities overhead 35% 45% 10% 10% 100%
Machine hours 6,200 5,800 12,000
Share of Materials Store overheads 40% 60% 100%
Required:
(i) Prepare a schedule showing the allocated and apportioned factory overhead costs for
each cost centre;
Cost Centre P1 P2 Materials Employee
Store Facilities
OH allocated $107,000 $89,000 $68,000 $84,000
Building depreciation & insurance (floor area) $15,960 $19,740 $2,520 $3,780
Management salaries (no. of employees) $9,000 $12,000 $3,000 $3,000
Power to operate machinery (machine hours) $6,510 $6,090 - -
Other utilities (share of other utilities OH 35:45:10:10) $3,290 $4,230 $940 $940
OH allocated & apportioned $141,760 $131,060 $74,460 $91,720
Question 8
The following information is available for two production cost centres in a factory for a period:
Prepared by Jessy Chong 张愫芯 75
CAT – Intermediate Level T4 – Accounting For Costs
Question 9
Three of the cost items that are included in the production overhead budget for a factory for a
period are:
Machine maintenance labour $33,600
Power $26,000
Rent and rates $39,800
Production overheads are currently absorbed using a single factory-wide rate.
It has been suggested that a separate overhead absorption rate should be calculated for each
of the three groups of machines in the factory. The following additional budgeted data has
been collected for the period:
Machine Group Total
MG 1 MG 2 MG 3
Floor area (m2) 1,600 1,400 1,000 4,000
Machine values ($’000) 320 250 230 800
Kilowatt hours (’000) 220 110 110 440
Machine maintenance (labour hours) 600 400 600 1,600
Number of indirect workers 4 4 2 10
Machine hours 8,200 5,600 4,900 18,700
Required:
a) Apportion each of the three items of budgeted overhead cost (machine maintenance
labour, power and rent and rates) to the three machine groups.
Machine Group MG 1 MG 2 MG 3
Machine maintenance labour (machine maintenance-lhr) 12,600 8,400 12,600
Power (kilowatt hrs) 13,000 6,500 6,500
Rent and rates (floor area) 15,920 13,930 9,950
Total OH 41,520 28,830 29,050
Workings:-
Machine maintenance labour (machine maintenance-lhr)
MG 1 = $33,600 x 600/1600 = $12,600
MG 2 = $33,600 x 400/1600 = $8,400
MG 3 = $33,600 x 600/1600 = $12,600
The totals of ALL budgeted production overhead cost items, allocated and apportioned to the
three machine groups, are as follows:
MG1 $129,560
MG2 $107,520
MG3 $119,070
Required:
b) Calculate an appropriate absorption rate for each machine group.
Machine Group MG 1 MG 2 MG 3
Total POH $129,560 $107,520 $119,070
Machine hours 8,200 5,600 4,900
OAR $15.80/Mhr $19.20/Mhr $24.30/Mhr
c) Calculate the production overhead that would be charged to Job J21 which requires five
hours on MG1 machines, two hours on MG2 machines and three hours on MG3 machines.
Machine Group MG 1 MG 2 MG 3
OAR $15.80/Mhr $19.20/Mhr $24.30/Mhr
Actual MHrs 5 2 3
OH absorbed $79.00 $38.40 $72.90
The planned production and sales levels for the first 3 months of the year ending 31 December
2010 are:
Month January February March
Production (units) 110 100 120
Sales (units) 80 110 100
The production levels in January to March are similar to the production levels that are planned
for the other 3 month periods during the forthcoming year. The company had no stocks of raw
materials or finished goods on 1 January 2010.
Production for every 3 months is 330 units (110u+100u+120u)
a) Produce a detailed standard cost card for 1 kilo of product X72 using:
(i) Absorption costing
(ii) Marginal costing
Marginal Costing Absorption Costing
$/u $/u
Ingredient: M1(0.25kilos/u x $2/kilo) 0.50 0.50
Ingredient: M2 (0.75kilos/u x $3/kilo) 2.25 2.25
Labour (0.20hrs/u x $4/hr) 0.80 0.80
VOH (0.20hrs/u x $6/hr) 1.20 1.20
Total VPC 4.75 4.75
FOH - 5.00
Total Costs 4.75 9.75
b) Produce a detailed forecast profit and loss account for the three month period ending on 31
March 2010 using:
(i) Absorption costing
(ii) Marginal costing
Profit and Loss account (Absorption Costing) Jan - Mar
$ $
Sales (290u x $15/u) 4350.00
Cost of sales
Opening inventory 0
Production (330u x $9.75/u) 3217.50
Closing inventory (40u x $9.75/u) (390.00) (2827.50)
Gross Profit 1522.50
Cost of sales
Opening inventory 0
Production (330u x $4.75/u) 1567.50
Closing inventory (40u x $4.75/u) (190.00) (1377.50)
Contribution 2972.50
FPOH ($6,600 x 3months ÷ 12months) (1650.00)
Net Profit 1322.50
c) Produce a statement reconciling the profit calculated in part (b)(i) with that calculated in
part (b)(ii).
MC Profit $1322.50
Increased in inventory level $200.00
(40u x $5/u)
AC Profit $1522.50
Illustration 3: X Limited
X Limited commence business on 1 March making one product only, the standard cost of which
is as follows:
$
Direct labour VPC 5
Direct material VPC 8
Variable production overhead VPC 2
Fixed production overhead FPC 5
Standard production cost 20
The fixed production overhead figure has been calculated on the basis of a budgeted normal
output of 36,000 units per annum. It is assumed that actual costs were the same as standard
costs and all budgeted fixed expenses are incurred evenly throughout the year.
The selling price per unit is $35 and the numbers of units produced and sold were:
March (units) April (units)
Production 2,000 3,200
Sales 1,500 3,000
a) Prepare the profit statements for each of the months of March and April using:
(i) Marginal costing
(ii) Absorption costing
Calculate cost unit under MC & AC
MC AC
Direct Labour $5.00 $5.00
Direct Material $8.00 $8.00
VPOH $2.00 $2.00
Total VPC $15.00 $15.00
FPOH $5.00
Total Costs $20.00
Cost of Sales
Opening Stock 0 7,500
Production @ $15 per unit 30,000 48,000
Closing Stock @ $15 per unit (7,500) (22,500) (10,500) (45,000)
30,000 60,000
VNPC – selling, distribution & administration @15% (7,875) (15,750)
CONTRIBUTION 22,125 44,250
Less:
Fixed Costs
FPC ($5 x 36,000u ÷ 12 months) 15,000 15,000
FNPC ($120,000 ÷ 12months) 10,000 (25,000) 10,000 (25,000)
MC PROFIT (2,875) 19,250
Cost of sales
Opening Stock 0 10,000
Production @ $20/u 40,000 64,000
Closing Stock @$20/u (10,000) (30,000) (14,000) (60,000)
GROSS STOCK 22,500 45,000
Over/(under) absorbed (5,000) 1,000
17,500 46,000
Less
NPC
VNPC 7,875 15,750
FNPC 10,000 (17,875) 10,000 (25,750)
AC PROFIT (375) 20,250
b) Present a reconciliation of the profit or loss figure given in your answers to (a)(i) and (a)(ii)
accompanied by a brief explanation.
March April
MC Profit (2,875) 19,250
Increased in inventory level 2,500 1,000
(500u or 200u) x $5/u
AC Profit (375) 20,250
30 September 31 December
Selling overheads 24,000 22,000
Distribution overheads 20,500 21,000
Administration overheads 16,000 17,000
a) Prepare separate profit statements using a columnar format clearly to show the results of
each quarter:
(i) under a marginal costing system
(ii) under an absorption costing system
Cost of Sales
Opening Stock 900 1,500
Production @ $3,000 per unit 3,600 3,000
Closing Stock @ $3,000 per unit (1,500) (3,000) (900) (3,600)
CONTRIBUTION 2,000 2,400
Less:
Fixed Costs
FPOH 900 900
FNPC - Selling 24.5 22
• Distribution 20.5 21
• Administration 16 (961) 17 (960)
MC PROFIT 1,039 1,440
Cost of sales
Opening Stock @$3750/u 1,125 1,875
Production @ $3750/u 4,500 3,750
Closing Stock @$3750/u (1,875) (3,750) (1,125) (4,500)
GROSS STOCK 1,250 1,500
Over/(under) absorbed 0 (150)
1,250 1,350
Less
FNPC - Selling 24.5 22
• Distribution 20.5 21
• Administration 16 (61) 17 (60)
AC PROFIT 1,189 1,290
b) Reconcile the profits given by each system, for the two quarters separately, and in total.
September December
($’000) ($’000)
MC Profit 1,039 1,440
Increased/(decreased) in inventory level 150 (150)
200u x $750/u
AC Profit 1,189 1,290
Illustration 5
A company, manufactures one product, has calculated its cost on a quarterly production
budget of 10,000 units. The selling price was $5 per unit. Sales of the last year were:
Quarter 1 10,000 units
Quarter 2 9,000 units
Quarter 3 7,000 units
Quarter 4 5,500 units
The level of stock at the beginning of the year was 1,000 units. The company maintained its
stock of finished products at the same level at the end of each of the four quarters.
Based on its quarterly production budget, the cost per unit was as follows:
Cost per unit $
Prime cost 3.50
Production overhead 0.75
Selling and distribution overhead 0.30
Total 4.55
Fixed production overhead, which has been taken into account in calculating the above
figures, was $5,000 per quarter. Selling and distribution overhead was treated as fixed, and was
charged against sales in the period in which it was incurred.
Years 1 2 3 4
($’000) ($’000) ($’000) ($’000)
Sales @$5/u 50 45 35 27.5
Cost of Sales
Opening Stock @$3.5/u 3.5 3.5 3.5 3.5
Production @$3.5/u 35 31.5 24.5 19.25
Closing Stock @$3.5/u (3.5) (3.5) (3.5) (3.5)
(35) (31.5) (24.5) (19.25)
15 13.5 10.5 8.25
Selling & Distribution OH @$0.30/u (3) (2.7) (2.1) (1.65)
Contribution 12 10.8 8.4 6.6
Less: FC
FPC (5) (5) (5) (5)
MC PROFIT 7 5.8 3.4 1.6
The actual fixed production overheads incurred for Period 1 and 2 were $80,000 and $90,000
respectively.
a) Prepare separate profit statements using a columnar format clearly to show the results of
each quarter:
(i) under a marginal costing system
(ii) under an absorption costing system
Cost of Sales
Opening Stock 0 25,600
Production @ $64 per unit 320,000 416,000
Closing Stock @ $64per unit (25,600) (294,400) (57,600) (384,000)
257,600 336,000
Variable Marketing Costs @$6 per unit (27,600) (36,000)
CONTRIBUTION 230,000 300,000
Less:
Fixed Costs
FPOH (80,000) (90,000)
MC PROFIT 150,000 210,000
Cost of Sales
Opening Stock @$79 per unit 0 31,600
Production @ $79 per unit 395,000 513,500
Closing Stock @ $79per unit (31,600) (363,400) (71,100) (474,000)
GROSS STOCK 188,600 246,000
Over/(under) absorbed (5,000) 7,500
183,600 253,500
Less
Variable Marketing Costs @$6 per unit (27,600) (36,000)
AC PROFIT 156,000 217,500
b) Reconcile the profits given by each system, for the two quarters separately, and in total.
Period 1 Period 2
MC Profit 150,000 210,000
Increased/(decreased) in inventory level 6,000 7,500
400u or 500u x $15/u
AC Profit 156,000 217,500
Units Details $
Direct material 11
Direct labour 4
Variable Production Overheads 2
Variable sales & distribution costs 3
VPC per unit $17 per unit
Other Details
Budgeted Fixed Production Overheads 36,000
Budgeted Production Units 12,000
FPOH per unit $3 per unit
Actual data
Units Produced Units Sold
Year 1 10,000 10,000
Year 2 9,000 7,000
Year 3 14,000 12,000
Year 4 8,000 8,000
The actual fixed production overheads incurred for all years were same as per budgeted.
Required
a) Prepare Profit Statement for the 4 years (above) showing details analysis of Costs of sales
using:
(i) Absorption costing
(ii) Marginal costing
Years 1 2 3 4
($’000) ($’000) ($’000) ($’000)
Sales @$30/u 300 210 360 240
Cost of Sales
Opening Stock @$20/u 0 0 40 80
Production @$20/u 200 180 280 160
Closing Stock @$20/u 0 (40) (80) (80)
(200) (140) (240) (160)
GROSS PROFIT 100 70 120 80
Over/(under) absorbed (6) (9) 6 (12)
94 61 126 68
Less: NPC
Variable sales & distribution @$3/u (30) (21) (36) (24)
AC PROFIT 64 40 90 44
Years 1 2 3 4
($’000) ($’000) ($’000) ($’000)
Sales @$30/u 300 210 360 240
Cost of Sales
Opening Stock @$17/u 0 0 34 68
Production @$17/u 170 153 238 136
Closing Stock @$17/u 0 (34) (68) (68)
(170) (119) (204) (136)
130 91 156 104
Variable sales & distribution @$3/u (30) (21) (36) (24)
Contribution 100 70 120 80
Less: FC
FPC (36) (36) (36) (36)
MC PROFIT 64 34 84 44
b) Reconcile the difference between profit figures obtained using both costing principles.
Years 1 2 3 4
($’000) ($’000) ($’000) ($’000)
MC PROFIT 64 34 84 44
Increased/decreased in inventory level @$3/u 0 6 6 0
AC PROFIT 64 40 90 44
$ per unit
Selling price 45.00
Direct materials cost 10.00
Direct wages cost 4.00
Variable overhead cost 2.50
VPC per unit $16.50 per unit
Fixed production overhead costs are budgeted at $400,000 per annum. Normal production
levels are thought to be 320,000 units per annum.
FPOH per unit = $400,000 ÷ 320,000u = $1.25 per unit
FPOH per quarter = $100,000
Budgeted selling and administration costs (NPC) are as follow:
Variable $1.50 per unit
Fixed $80,000 per annum
Fixed S&A per quarter $20,000 per quarter
Budgeted administration costs are $120,000 per annum.
Budgeted Administration $30,000 per quarter
The following pattern of sales and production is expected during the first six months of 20x9:
January – March April – June
Sales (units) 60,000 90,000
Production (units) 70,000 100,000
There is to be no stock on 1 January 20x9.
Cost of Sales
Opening Stock 0 165
Production @ $16.5 per unit 1,155 1,650
Closing Stock @ $16.5per unit (165) (990) (330) (1485)
1,710 2,565
Variable S&A @$1.5 per unit (90) (135)
CONTRIBUTION 1,620 2,430
Less:
Fixed Costs
FPOH 100 100
Selling & Distribution 20 20
Administration 30 (150) 30 (150)
MC PROFIT 1,470 2,280
Cost of Sales
Opening Stock @ $17.75 per unit 0 177.50
Production @ $17.75 per unit 1,242.50 1,775
Closing Stock @ $17.75 per unit (177.50) (1065) (355) (1597.50)
GROSS STOCK 1,635 2,452.50
Over/(under) absorbed (12.5) 25
1,622.50 2,477.50
Less
Variable S&A @$1.5 per unit 90 135
Selling & Distribution 20 20
Administration 30 (140) 30 (185)
Prepared by Jessy Chong 张愫芯 85
CAT – Intermediate Level T4 – Accounting For Costs
OH absorbed OAR x Actual units produced 70,000u x $1.25 87.50 100k u x $1.25 125
Actual OH incurred 100 100
Over/(under) absorbed (12.5) 25
b) Te reconcile the profits for the quarter January – March 20x9 in your answer to (a) above
Jan – Mar Apr – Jun
($’000) ($’000)
MC Profit 1,470 2,280
Increased/(decreased) in inventory level 12.5 12.5
10,000u x $1.25/u
AC Profit 1,482.50 2,292.50
c) To write up the fixed production overhead control account for the quarter to 31 March 20x9,
using absorption costing principles. Assume that the fixed production overhead costs
incurred amounted to $102,400 and the actual production was 74,000 units
FPOH Control A/C
$’000 $’000
Actual OH incurred 102,400 FOH to WIP 105,714
Under-absorbed 3,314 (74,000u x $100,00 ÷ 70,000u)
105,714 105,714
d) To state and explain briefly the benefits of using marginal costing as the basis of
management reporting.
• It is simple to operate. Closing stocks are valued at marginal production cost.
• There are no apportionments of fixed costs. Fixed costs are charged in full against the profit of the period in
which they are incurred.
• Under or over absorption of fixed overheads is avoided
• Better information about expected profit is obtained from the use of variable costs and contribution in the
accounting system
Illustration 9
A company is currently operating at a level 40% below practical manufacturing capacity due
to both a decline in the market for its products and, at the same time, a reduction in its market
share.
For the year just ended, the summary absorption costing profit statement is as follows:
$000 $000
Sales revenue 11,200
Production cost of sales:
Opening stock of finished goods (60,000 units) 540
Cost of production (VPC $6630 + FPC $1610) 8,240
Closing stock of finished goods (80,000 units) (720) (8,060)
Gross profit (before adjustment) 3,140
Under-absorbed fixed production overheads (210)
Gross profit (after adjustment) 2,930
Non-production overheads (2,805)
Net profit 125
In both the opening and closing stock figures in the above profit statement, fixed production
overheads average $2.00 per unit of finished product. Fixed production overheads absorbed
into the cost of production in the year totaled $1,820,000. Non-production overheads include
variable costs of $710,000 and fixed costs of $2,095,000.
a) Prepare a marginal costing profit statement for the year just ended
Prepared by Jessy Chong 张愫芯 86
CAT – Intermediate Level T4 – Accounting For Costs
$’000 $’000
Sales 11,200
Cost of Sales:
Opening Stock (60,000u x $7/u) 420
Production 6,630
Closing Stock (80,000u x $7/u) (560) (6,490)
4,710
VNPC (710)
Contribution 4,000
Less:
FPC 1,820
FNPC 2,095 (3,915)
MC Profit 85
b) Explain, with supporting figures, the difference between the profit in (a) above and that in the
absorption costing profit statement.
MC Profit 85
Increased in inventory level 40
20,000u x $2/u
AC Profit 125
QUESTIONS
1. Total contribution is calculated by which formula?
A Total revenue less total costs
B Total revenue less variable costs
C Total revenue less fixed costs
D Total revenue less production costs
Sales – variable costs = contribution
2. A company currently uses absorption costing. Information below relates to Product X for
Month 1:
Opening stock Nil
Production 900 units
Sales 800 units
If the company had used marginal costing, which of the following combinations would be
true?
Profit Stock
A would be higher would be higher
B would be higher would be lower
C would be lower would be higher
D would be lower would be lower
Closing stock > opening stock ; AC profit > MC profit; AC = VPC + FPC > MC = VPC
3. A company uses marginal costing. In valuing stocks of finished goods which of the following
would NOT be included in the valuation?
A Machine operator’s wages VPC
B Factory rent FPC
C Royalty fees per unit VPC
D Raw materials VPC
4. The use of marginal costing as opposed to absorption costing may result in a difference in
the reported profit for an accounting period.
In which of the following circumstances, would the use of marginal costing, rather than
absorption costing, result in higher reported profits?
Opening stocks Closing stocks
A 100 units 50 units
B 0 units 50 units
C 100 units 100 units
D 0 units 0 units
Opening Stock > Closing Stock; MC profit > AC profit
5. The overhead absorption rate for product Y is $2.50 per direct labour hour. Each unit of Y
requires 3 direct labour hours. (FPOH per unit = $2.50/Lhr x 3 Lhr = $7.50/u) Stock of product Y at the
beginning of the month was 200 units and at the end of the month were 250 units. Closing
stock > opening stock; AC profit > MC profit
What is the difference in the profits reported for the month using absorption costing
compared with marginal costing?
What’s the incremental value of inventory? (250u – 200u) x $7.50/u = $375
A The absorption costing profit would be $375 less
B The absorption costing profit would be $125 greater
C The absorption costing profit would be $375 greater
D The absorption costing profit would be $1,875 greater
6. A company produces a single product for which cost and selling price details are as follows:
$ per unit $ per unit
Selling price 28
Direct material 10
Direct labour 4
Variable overhead 2
Fixed overhead 5 21
Profit per unit 7
Last period, 8,000 units were produces and 8,500 units were sold. The opening stock was
3,000 units (What’s the closing stock? Opening 3,000u + production 8,000u – sold 8,500u = closing 2,500u) (closing
stock < opening stock; AC profit < MC profit) and profits reported using marginal costing was $60,000.
The profits reported using an absorption costing system would be
A $47,500 C $59,500
B $57,500 D $62,500
MC Profit $60,000
Decreased in inventory value ($2,500)
(500u x $5/u)
AC Profit $57,500
7. A company had opening stock of 48,500 units and closing stock of 45,500 units(closing stock <
opening stock ; AC profit < MC profit). Profits based on marginal costing were $312,250 and on
absorption costing were $288,250. What is the fixed overhead absorption rate per unit?
A $5.94 C $6.50
B $6.34 D $8.00
MC Profit $312,250
Decreased in inventory value ($24,000)
(3,000u x $FOAR/u)
AC Profit $288,250
8. When comparing the profits reported under marginal costing and absorption costing when
the level of stocks increased: closing stock > opening stock; AC profit > MC profit
A Absorption costing profits will be lower and closing stock valuations higher than the
marginal costing
B Absorption costing profits and closing stock valuations lower than the marginal costing
C Absorption costing profits will be higher and closing stock valuations lower than the
marginal costing
D Absorption costing profits and closing stock valuations higher than the marginal costing
9. When comparing the profits reported using marginal costing with those reported using
absorption costing in a period when closing stock was 1,400 units, opening stock was 2,000
units (closing stock < opening stock; AC profit < MC profit), and actual production was 11,200 units at a
total cost of $4.50 per unit compared to a target cost of $5.00 per unit, which of the following
statements is correct?
A Absorption costing reports profits $2,700 higher
B Absorption costing reports profits $2,700 lower
C Absorption costing reports profits $3,000 higher
D There is insufficient data to calculate the difference between the reported profits.
10. A company made 17,500 units at a total cost of $16 each (VPC $12; FPC $4). Three quarters of
the costs were variable and one quarter was fixed. 15,000 units were sold at $25 each. There
were no opening stocks. (Closing stock > opening stock; AC profit > MC profit)
By how much will the profits calculated using absorption costing principles differ from the
profit if marginal costing principles had been used?
A The absorption costing profit would be $22,500 less.
B The absorption costing profit would be $10,000 greater
C The absorption costing profit would be $135,000 greater
D The absorption costing profit would be $10,000 less
What’s the incremental inventory value?
2500u x $4/u = $10,000
11. In a period where opening stocks were 15,000 units and closing stocks 20,000 (closing stock >
opening stock; AC profit > MC profit), a firm had a profit of $130,000 using absorption costing. If the
fixed overhead absorption rate was $8 per unit, the profit using marginal costing would be:
A $90,000 C $170,000
B $130,000 D Impossible to calculate
MC profit $A
Increased inventory value $40,000
(5,000u x $8/u)
AC profit $130,000
12. A manufacturing company produces a single product which has a selling price of $19 per
unit and a unit cost of $14 as follows:
$ per unit
Direct material VPC 5
Direct labour VPC 4
Variable production overhead VPC 2
Fixed production overhead FPC 3
14
Last period, the opening stock was 3,000 units and 13,000 units were produced. Sales were
14,000 units (closing stock < opening stock; AC profit < MC profit) and the profits reported using
marginal costing was $67,000. The profits reported under an absorption costing system would
be:
A $64,000 C $70,000
B $65,000 D Impossible to calculate
MC profit $67,000
Decreased inventory value ($3,000)
(1,000u x $3/u)
AC profit $64,000
$’000 $’000
Sales 1,000 2,000
Production costs: Variable 400 800
Fixed 200 200
VPC per unit = $400,000 ÷ 200,000u = $2 per unit
Selling price per unit = $1,000,000 ÷ 200,000u = $5 per unit
There were no stocks of Product B at the start of the quarter in which 110,000 units were
produced and 80,000 units were sold.
13. The amount of fixed production costs absorbed by Product B in the first quarter, using
absorption costing, is:
A $80,000 C $110,000
B $40,000 D $55,000
OH absorbed = FPOH per unit x Actual unit produced
= $0.50 per unit x 110,000u
= $55,000
14. The over/(under) absorption of fixed production costs in the first quarter is:
A ($5,000) C $10,000
B $5,000 D $15,000
OH absorbed $55,000
Actual OH incurred $50,000
Over absorbed $5,000
15. The net profit (or loss) for the first quarter using absorption costing, is:
A ($115,000) C ($175,000)
B $50,000 D $125,000
$ $
Sales (80,000u x $5/u) 400,000
Cost of sales
Opening stock 0
Production (110,000u x $2.50/u) 275,000
Closing Stock (30,000u x $2.50/u) (75,000) (200,000)
GROSS PROFIT 200,000
Over-absorbed 5,000
205,000
Less:
Non-production costs
Selling, distribution and administration
- Variable (80,000u x $1/u) 80,000
Prepared by Jessy Chong 张愫芯 90
CAT – Intermediate Level T4 – Accounting For Costs
16. The net profit (or loss) for the first quarter, using marginal costing, is:
A $35,000 C $65,000
B ($340,000) D ($115,000)
Two ways to answer this question:
Prepare the profit statement
Reconciliation statement
MC profit $???
Increased in inventory value $15,000
(30,000u x $0.50/u)
AC profit $50,000
18. A company sells more than it manufactures in a period. (Closing < Opening; AC profit < MC profit)
Which of the following explains the difference in profit between absorption and marginal
costing in the above situation?
A Absorption costing profit is higher because of the difference in inventory levels
B Absorption costing profit is lower because of the difference in inventory levels
C Absorption costing profit is higher because of overhead over-absorption
D Absorption costing profit is lower because of overhead under-absorption
20. A company sold 56,000 units of its single product in a period for total revenue of $700,000.
Finished stock increased by 4,000 units in the period.
Costs in the period were:
Prepared by Jessy Chong 张愫芯 91
CAT – Intermediate Level T4 – Accounting For Costs
21. A company with a single product sells more units than it manufactures in a period.
Closing stock < Opening stock; AC profit < MC profit
Which of the following correctly describes the use of marginal costing in comparison with
absorption costing in the above situation?
A Both profit and stock values will be higher
B Both profit and stock values will be lower
C Profit will be higher; stock values will be lower
D Profit will be lower; stock values will be higher
23. A company uses a marginal costing system. 10,000 units of its single product were
manufactured in a period during which 9,760 units were sold. Closing stock > Opening stock
AC profit > MC profit
If absorption costing is applied instead what would be the effect on profit?
A Higher by (240 units x fixed production overhead cost per unit)
B Lower by (240 units x fixed production overhead cost per unit)
C Higher by [240 units x (fixed production overhead cost per unit + fixed non-production
overhead cost per unit)]
D Lower by [240 units x (fixed production overhead cost per unit + fixed non-production
overhead cost per unit)]
Production overhead is absorbed at a rate per direct labour on hours worked by the electricians
and the current rate is $3.40.
Administration overhead is charged on the basis of 15% of total production cost whilst 5% of the
selling price is allowed for selling overhead.
Prepare a job cost sheet for Job XY999, showing separate totals for:
a) Prime cost
$ $
Direct Materials
AA329 (400m x $0.50/m) 200
RR318 (54m x $0.40/m) 21.6
WW165 (6u x $21.50/u) 129
CC214 (4litres x $3/l) 12 362.6
Direct Labour
Electricians (30hrs x $6.50/hr) 195
Labourers (30hrs x $3.80/hr) 114
Apprentices (15hrs x $2.20/hr) 33 342
PRIME COST 704.6
b) Production cost
$ $
PRIME COST 704.6
POH
Electricians (30hrs x $3.4/hr) 102
Total Production Cost 806.6
The firm uses a cost plus system for setting selling prices and expects a 25% gross profit.
Administrative overheads are absorbed as 10% of selling price.
Calculate the production costs incurred, administrative overheads absorbed, selling price and
the net profit of JOB 123.
$ $
Direct materials 3,280
Direct Labours
Dept A (420hrs x $3.50/hr) 1,470
Dept B (686hrs x $3/hr) 2,058 3,528
PRIME COST 6,808
FPOH
Sales $18,131
Total costs ($15,411)
Net Profit $ 2,720
Illustration 3
During a period work was started on three jobs. Details of the jobs were as follow:
Job 1001 ($) Job 1002 ($) Job 1003 ($)
Materials issues 850 625 350
Direct wages 2,830 1,975 1,280
Direct expenses 125 350 50
$75 of materials were returned to stores from Job 1002 and $25 of materials were transferred
from Job 1001 to Job 1003. Production overheads are absorbed at 200% of direct wages.
Job 1001 was completed during the period and invoiced to the customer at $17,500.
Prepare the job cost card for all the jobs and calculate the profit of Job 1001.
Job 1001 ($) Job 1002 ($) Job 1003 ($)
Materials issues 850 625 350
Adjustment (25) (75) 25
Direct materials 825 550 375
Direct wages 2,830 1,975 1,280
Direct expenses 125 350 50
PRIME COST 3780 2875 1705
POH @200% Direct wages 5660 3950 2560
PRODUCTION COST 9440 6825 4265
Labour is paid at $8 per hour and production overheads are absorbed at a rate of $12 per
direct labour hour. Hours worked during the month of April were:
Jobs 141 142 143 144
Labour hours 8 16 18 14
Jobs 141, 142 and 13 were completed during the month.
Example:
Department B of Blue Plc produces a component from a standard length of material Z. In April
4,000 metres of Z at $15 per metre were issued to production. Conversion costs incurred were
$16,000. The output for the month was 3,950 good components. The balance of the metres were
scrapped and sold off at $2 per metre.
Calculate the unit cost of each good component produced.
Direct Materials 4,000m x $15/m $60,000
Scrapped value 50m x $2/m ($100)
$59,900
Conversion Costs $16,000
Total Costs $75,900
Budgeted direct labour rates per hour for Year 6 are $6.20, $7.10 and $5.40 for Cost centres 24,
26 and 27 respectively.
Budgeted production absorption rates per hour for Year 6 are $8.10, $7.40 and $6.30.
The company has budgeted to make and sell 4,800 product units during Year 6. Many
customers will purchase a single product unit. A few customers will purchase as many as 50
product units.
a) Calculate the direct labour hours needed in each cost centre to meet the sales budget for
Year 6.
Cost Centre 24 26 27
Operating hours 0.25 0.20 0.10
Total Lhrs 1200 960 480
b) Calculate the production cost of a batch of base units, and the cost per unit, if a batch
comprises 200 base units.
4800 base units $ $
Direct Materials 4800u x $1.20/u 5760
Direct Labour
Cost Centre 24 (1200hrs x $6.20/hr) 7440
Cost Centre 26 (960hrs x $7.10/hr) 6816
Cost Centre 27 (480hrs x $5.40/hr) 2592 16848
PRIME COST 22608
POH
Cost Centre 24 (1200hrs x $8.10/hr) 9720
Cost Centre 26 (960hrs x $7.40/hr) 7104
Cost Centre 27 (480hrs x $6.30/hr) 3024 19848
PRODUCTION COST per batch 42456
Direct labour
Cutting: 2 hours at $5 10
Machining: 200 hours at $3.50 700
Finishing: 30 hours at $4 120 830
1,700
Production overheads
Cutting: 2 hours at $25 50
Machining: 200 hours at $1 200
Finishing: 30 hours at $5 150 400
2,100
Additional information:
Administration overhead is absorbed at 10% of sales value, selling and distribution overhead at 5%
of sales value. Profit margin (Net Profit Margin) is 25% of sales value.
Prepared by Jessy Chong 张愫芯 96
CAT – Intermediate Level T4 – Accounting For Costs
a) Determine the quotation price for the batch of 50 golf club blazers and the estimated profit
which would result from this price.
Sales $3500
Production cost ($2100)
Gross Profit $ 1400
Less: Non Production Cost
Administration (10% x $3500) ($350)
S&D (5% x $3500) ($175)
Net Profit $875
b) Guess Ltd successfully quoted for the blazers at the price calculated in (a) above. After the
order has been completed and delivered, the following actual information is:
Cloth: 160m at $4.70 used
Cutting time: An extra 2 hours were needed compared to estimate
Machining: 20 fewer hours were needed, but the direct labour rate had increased by
$0.50 per hour
Finishing: 35 hours at $4.20 per hour were required
Prepare a batch cost card showing estimated and actual production costs, along with estimated
and actual profit (or loss) on the batch.
Direct materials $ $
Cloth: 150m at $4.50/m 675
Chrome buttons: 300 at $0.25 each 75
Sundry 120 870
Direct labour
Cutting: 2 hours at $5 10
Machining: 200 hours at $3.50 700
Finishing: 30 hours at $4 120 830
1,700
Production overheads
Cutting: 2 hours at $25 50
Machining: 200 hours at $1 200
Finishing: 30 hours at $5 150 400
2,100
Direct materials $ $
Cloth: 160m at $4.70/m 752
Chrome buttons: 300 at $0.25 each 75
Sundry 120 947
Direct labour
Cutting: 4 hours at $5 20
Machining: 180 hours at $4.00 720
Finishing: 35 hours at $4.20 147 887
Production overheads
Cutting: 4 hours at $25 100
Machining: 180 hours at $1 180
Finishing: 35 hours at $5 175 455
2,289
The standard cost of raw material is $0.30 per kilogramme and the bottles are always produced
in the ratio of 4:3:1 Total production quantities can vary from week to week. Company records
show that in the last year the highest weekly production level achieved was 16,000 bottles and
the lowest weekly production level was just 12,800 bottles.
The company employs a total of 10 production staff each of whom are paid $140 per week
whatever production level is achieved. The number of staff that work on each type of bottle is
as follows:
Bottle type Q1 Q2 Q3
Employees 4 4 2
Production overheads are all fixed costs and total $5,400 per week. They are apportioned to
each type of bottle in the ratio of 4:3:2.
a) Calculate how many bottles of each type were produced in the week with the highest
production level and how many bottles of each type were produced in the week with the
lowest production levels.
Bottle type Production ratio Output 16,000 bottles Output 12,800 bottles
Q1 4 8,000 6,400
Q2 3 6,000 4,800
Q3 1 2,000 1,600
b) Calculate separately the cost of producing a single unit of each type of bottle when the
weekly production level achieved is:
i. 12,800 bottles in total
ii. 16,000 bottles in total (calculate the unit costs to four decimal places of a $)
Workings:
Direct Material Cost
Q1 8,000 bottles x 0.3kgs x $0.3/kg = $720
Q2 6,000 bottles x 0.4kgs x $0.3/kg = $720
Q3 2,000 bottles x 0.5kgs x $0.3/kg = $300
c) Completed bottles are sent to another company for cleaning, labelling and packing. This
company employs several part-time personnel to clean, label and pack the bottles. This
staffs are paid on an incremental piecework basis. The details of the piecework scheme are
as follows:
No of bottles prepared and packed Rate paid per bottle
1,001 – 2,000 $0.016
2,001 – 3,000 $0.017
3,001 – 4,000 $0.018
* Note: Only the extra bottles qualify for the higher rates, and any bottles that are broken are
deducted from the number of bottles that qualify for piecework.
The figures below refer to the output achieved by three of the employees in a week:
Employee A B C
Bottles prepared and packed 2,500 2,300 3,900
Bottles broken 50 150 100
Output 2,450 2,150 3,800
Calculate separately the amount payable to each of employees A, B and C based on the
output achieved above.
Employees A B C
Output 2,450 2,150 3,800
1001-2000 @ $0.016 32 32 32
2001-3000 @ $0.017 7.65 2.55 17
3001-4000 @ $0.018 - - 14.4
TOTAL ($) 39.65 34.55 63.40
QUESTIONS
1. Which costing method would be most suitable for an accountancy firm?
A Contract costing C Batch costing
B Job costing D Process costing
2. A firm of accountants conducts a number of audits for local companies each year.
Which of the following costing methods would it use?
A Contract costing C Job costing
B Service costing D Batch costing
Service costing relates to a business which provides a similar service to many customers, measured in units such as
passenger-miles (transport) or bed-days (hospital).
Batch costing is relevant to a production situation where batches of relatively small numbers of identical units are
produced; production may then switch to a batch of a different product.
3. For a particular company the relationship between profit and selling price is given by the
formula:
Profit = 15% of the selling price.
What would be the selling price and profit for a job that had a total cost of $8,500?
Total cost = 85% of sales
Sales = $10,000
Profit = $1,500
Selling price Profit
A $9,775 $1,275
B $9,775 $1,500
C $10,000 $1,275
D $10,000 $1,500
(ii) The overheads for the period were exactly as budgeted, $140,000.
Job 3 was completed during the period and consisted of 2,400 identical circuit boards.
The firm adds 50% to total production costs to arrive at a selling price.
What is the selling price of a circuit board?
A It cannot be calculated C $41.41
B $31.56 D $55.21
How to absorb the OH? Information is not completed.
6. P Limited manufactures ring binders which embossed with the customer’s own logo. A
customer has ordered a batch of 300 binders. The following data illustrates the cost for a
typical batch of 100 binders.
Prepared by Jessy Chong 张愫芯 100
CAT – Intermediate Level T4 – Accounting For Costs
$
Direct materials 30
Direct wages 10
Machine set up 3
Design and artwork 15
58
POH (20% x $10) 2
Total Production cost 60
Non Production cost
S, D & A cost (5% x $60) 3
Total cost 63 75% of sales
Mark-up 21 25% of sales
Sales 84 100% of sales
Direct employees are paid on a piecework basis Piece rate is $0.10 per unit.
P Limited absorbs production overhead at a rate of 20 per cent of direct wages cost. Five
per cent is added to total production cost of each batch to allow for selling, distribution and
administration overhead.
P Limited requires a profit margin of 25 per cent of sales value.
The selling price for a batch of 300 binders (to the nearest cents) will be:
A $189.00 C $201.60
B $193.20 D $252.00
7. Deli Lily Ltd is a small jobbing company. Budgeted direct labour hours for the current year
were 45,000 hours and budgeted direct wages costs were $180,000. OAR = $4/Lhr
Job number 34679, a rush job for which overtime had to be worked by skilled employees,
had the following production cost:
$ $
Direct materials 2,000
Direct wages Normal rate (400hrs) 2,000
Overtime premium 500 2,500
Production overhead 4,000
8,500
Production overhead is based on a direct labour hour rate. ($4000/400hrs) = $10/hr
If production overhead had been based on a percentage of direct wages costs instead, the
production job number 34679 would have been: $10/hr x 45,000hrs ÷ $180,000 = 250% of direct wages
A $8,500 C $10,250
B $9,500 D $10,750
POH 250% of direct wages = 250% x $2500 = $6250
Direct Materials = $2000
Direct Wages = $2500
Total $10750
8. Each of the following statements is true about job order costing systems, EXCEPT:
A A job order costing system is a method used for estimating product costs based on
detailed records of the cost flow for each job in firms that have several distinct products.
B A job order costing system estimates costs of manufacturing products for different jobs
required for customer orders.
C A job order costing system produced the means to estimate costs so that bids can be
prepared.
D A job order costing system relies on the concept of conversion costs.
9. What is the correct amount of Job Cost for EC1 given the following information:
Direct Materials = $3,000
Direct Labour = 2,500 hours
Manufacturing Overhead = $4,700
Labour hourly rate is $2.00 per hour.
Prepared by Jessy Chong 张愫芯 101
CAT – Intermediate Level T4 – Accounting For Costs
A $5,500
B $10,200
C $7,200
D $12,700
Direct Material $3,000
Direct Labour ($2/hr x 2,500hrs) $5,000
POH $4,700
TOTAL $12,700
10. Job XX has been completed at a total production cost of $3,633. Administration and selling
overheads are applied at 20% of production cost. The selling price of each job is established
so as to provide a GROSS profit margin of 30%.
What is the selling price of Job XX?
A $4,723
B $5,190
C $5,668
D $6,228
GROSS profit 30% of sales $1557
Total production 70% of sales $3633
Sales 100% of sales $5190
11. A job cost estimate includes 630 productive labour hours. In addition, it is anticipated that
idle time will be 10% of the total hours paid for the job. The wage rate is $12 per hour.
What is the total estimated labour cost for the job?
A $6,804
B $7,560
C $8,316
D $8,400
630 hours (exclusive 10% idle time) 90%
Total labour hours = 630hours ÷ 0.9 = 700 hours
Total labour costs = 700 hours x $12/hr = $8,400
12. The production cost of Job J6 was $12,600. Administration costs are charged to jobs at 30%
of production cost. The amount charged to the customer is calculated to provide a GROSS
PROFIT MARGIN of 40%.
What is the net profit on Job J6?
A $1,260
B $4,620
C $10,920
D $15,120
W1 W2
Gross profit 40% $8,400 Gross Profit $8,400
Production 60% $12,600 Less: NPC
Sales 100% $21,000 Admin (30% x $12,600) ($4,780)
Total $4,620
Question 1 Company X
Company X is preparing a job cost estimate that will be used to provide a quote for a potential
customer. Estimated costs for the job are to be based on the following:
Direct materials $2,893
Direct labour 210 hours at a basic rate of $8.00 per hour.
Direct production staff also receives a bonus each period. The bonus is paid on actual hours
worked at a rate per hour calculated using the following formula:
{[(time allowed – time worked) ÷ time allowed] × basic rate per hour}
The bonus to be included currently in the costing of all jobs is based on the following estimates
for the period:
Total time worked 3,400 labour hours
Total time allowed 4,000 labour hours
Required:
(a) Calculate the total estimated PRODUCTION cost of the job.
Estimated production costs of the job
$ $
Direct materials 2,893
Direct labour:
Basic 1,680 (210 hours × $8/hr)
Bonus 252 (210 hours × $1.2/hr*)
–––––
Total 1,932
–––––
Prime cost 4,825
Production overhead:
20% of prime cost 965 ($4,825 × 0.2)
$9·00 per direct labour hour 1,890 (210 hours × $9/hr)
–––––
Total 2,855
–––––
Total production cost 7,680
–––––
* Bonus per hour = {[(4,000 – 3,400) ÷ 4,000] × £8/hr} = £1·20 per hour
(b) Calculate the price that should be quoted for the job.
Quote for the job
$
Total production cost 7,680
Other overheads 1,920 ($7,680 × 0.25)
––––––
Total cost 9,600
Profit 2,400 [(9,600 ÷ 0.8) – 9,600]
––––––
Selling price 12,000
––––––
Relevant data:
Material Y - 1000kg @ $2.00 per kg
Material Z - 500kg @ $1.50 per kg
5 workers are required to operate production machines. Each is paid at rate of $80/day for a 5-
days week.
Output is 1500kg.
Workings
(W1) Material Y 1000kgs x $2/kg $2000 $/kg of output = $5700/1500kg
(W2) Z 500kgs x $1.50/kg $750 = $3.80/kg
(W3) Labour 5 workers x $80/day x 5 days $2000
2 PROCESSES
(Note: Feature of process environment is that output of one process will become input of another
process.)
Product “Q” is manufactured by passing through 2 processes, Process 1 & Process 2. The
following details relate to both processes for June 20x9.
Process 1 Process 2
Material (kg) 1000 5000
Material costs ($) 5000 12000
Labour hours 3000 1000
Labour costs 18000 8000
Expenses ($) 2500 1500
Overheads Absorption Rates ($/dlhr) 5 4
Output (kg) 1000 6000
All completed units from Process 1 will be input for Process 2.
Required
Prepare process 1 & 2 Accounts
Process 1 Account
Kg $ Kg $
Material 1000 5000 Output (Process 2) 1000 40500
Labour 18000
Expenses 2500
OH 15000 (W1)
1000 40500 1000 40500
Working
(W1) OH $5/hr x 3000hrs = $15000 $/kg of output = $40500/1000kg = $40.50/kg
Process 2 Account
Kg $ Kg $
Process 1 1000 40500 Output 6000 66000
Material 5000 12000
Labour 8000
Expenses 1500
OH 4000 (W1) 6000 66000
6000 66000
Working
(W1) OH $4/hr x 1000hrs = $4000 $/kg of output = $66000/6000kg = $11/kg
Illustration 2
A tool is manufactures in Process 1. Following data are relevant:
Input Output Others
1500kg if Steel (@ $3/kg) 1350kg Normal loss is
Labour Costs $2500 expected at 10% of
Direct Expenses $300 input.
Overheads $1200
Prepare Process 1 & Normal loss account if…
(a) Losses have no scarp value
(b) Losses can be scrapped at a value of $0.867/kg
150 -
Working
(W1) Normal Loss 150kgs x $0.867/kg = $130.05 ~ $130
$/kg of output = $8370/1350kg = $6.2/kg
Illustration 3
A Water Container is produced after passing through Process 1. Relevant data are given below:
Input Output Others
1000kg of plastic @ $2/kg 850kg are produced Normal Loss is expected
Labour costs $800 at 10% of input
Direct Exp. $250 No WIP
Overheads $250 Scarp can be sold at
$0.50/kg
Prepare Process 1 account, normal Loss account & abnormal loss or gain account.
Answer
Step 1 Calculation of losses
*Remember: If there are losses in question, always calculate the loss. This step avoids mistake and may gain you some marks in
the exam!!!
Process 1 Account
Kg $ Kg $
Plastic 1000 2000 Normal Loss (10%) 100 50 (W1)
Labour 800 Output 850 3069 (W2)
Expenses 250 Abnormal Loss 50 181(W2)
OH 250
1000 3300 1000 3300
Working
(W1) Normal Loss 100kg x $0.50/kg = $50
(W2) Calculate the cost per kg of expected output
Notes:
• Abnormal loss is given a COST
• The cost of a abnormal loss is the same as a cost of one unit of good output from the process
• The cost of abnormal loss is treated as a charge against profit in the period it occurs
• Without scrapped value written off to the income statement
• With scrapped value written off the balance to the income statement
100 50 100 50
ABNORMAL GAIN
As such, we reserve the entries of Abnormal Loss for Abnormal gain, but with minor difference.
A Water Container is produced after passing through Process 1. Relevant data are given below:
Input Output Others
1000kg of plastic @ $2/kg 850kg are produced Normal Loss is expected at
Labour costs $800 20% of input
Direct Exp. $250 No WIP
Overheads $250 Scarp can be sold at $0.50/kg
Prepare Process 1 account, normal Loss account & abnormal loss or gain account.
Answers:
Process 1 Account
Kg $ Kg $
Plastic 1000 2000 Normal Loss (20%) 200 100 (W1)
Labour 800 Output 850 3400
Expenses 250
OH 250
Abnormal GAIN 50 200
1050 3500 1050 3500
Working
(W1) Normal Loss 200kg x $0.50/kg = $100
(W2) Calculate the cost per kg of expected output
[Better Approach]
Total costs of production – scrapped value = $3200 = $4/kg
Expected output (W3) 800kg
Notes:
• Abnormal GAIN is given a value
• The value per unit of abnormal gain is calculated in the same way as a cost per unit of abnormal gain is calculated
• Without scrapped value The gain is taken to the income statement as an item of profit for the period
• With scrapped value the profit should be reduced by the amount of income that would be earned from the sales
of scrap had the loss been normal
(N1) Actual losses are 150kgs only. The scrapped value (150kgs x $0.50/kg) is $75
Illustration 4
Details of a process 1
Input:
D. Material 600kg $24,000
D. Labour $12,000
D. Expenses $4,000
Overheads $10,000
Output:
400kg completed.
200kg in progress with degree of completion
Raw Material 100%
Labour 60%
Expenses 60%
Overheads 50%
Notes:
• Unfinished production (WIP) is the processing work has not yet been completed.
• It is valued using the concept of ‘equivalent units’.
• ‘Equivalent units’ means the equivalent of one finished unit of output.
• CWIP has all of its Direct Materials (100%) because the direct materials are all input at the start of the process.
Statement of Evaluation
Input $/EU Output Elements
Output CWIP
EU $ EU $
D. Material $40/EU 400 16000 200 8000
D. Labour $23.0769/EU 400 9230.76 120 2769.228
D. Expenses $7.6923/EU 400 3076.92 120 923.076
OH $20/EU 400 8000 100 2000
(W1) 36308 (W2) 13692
Process B
Labour $12,000
Prod. O/H $6,000
Units transferred to store 3500kg
Working:
Normal Loss = 250kg x $2/kg = $500
Statement of Equivalent Units & Costs
Input Output Input Elements
Material Labour POH
kg % Oty % Oty % Oty
Material Output 4050 100 4050 100 4050 100 4050
Labour CWIP 400 100 400 80 320 45 180
POH Abnormal 300 100 300 100 300 100 300
4750 4670 4530
Cost per EU = Total input – scrap value $/EU = $15k-0.5k/4750 $/EU = $15k/4670 $/EU = $4k/4430
Total EU $3.053/EU $3.212/EU $0.883/EU
Statement of Evaluation
Input $/EU Output Elements
Output CWIP Abnormal Loss
EU $ EU $ EU $
Material $3.053/EU 4050 12365 400 1221 300 915
Labour $3.212/EU 4050 13009 320 1027 300 963
POH $0.883/EU 4050 3576 180 159 300 265
(W2) 28950 (W3) 2407 (W4) 2143
Process B Account
Kg $ Kg $
Process A 4050 28950 Normal Loss (W1) 405 2025
Labour 12000 Output (FG) (W2) 3500 43880
POH 6000 CWIP (W3) 300 2989
Abnormal gain (W4) 155 1944
4250 48994 4250 48894
Working:
Normal Loss = 405kg x $5/kg = $2025
Cost per EU = Total input – scrap value $/EU = $28950-$2025/3645 $/EU = $12k/3495 $/EU = $6k/3495
Total EU $7.387/EU $3.433/EU $1.717/EU
Statement of Evaluation
Input $/EU Output Elements
Output CWIP Abnormal Gain
EU $ EU $ EU $
Process A $7.387/EU 3500 25854 300 2216 (155) (1145)
Labour $3.433/EU 3500 12016 150 515 (155) (532)
POH $1.717/EU 3500 6010 150 258 (155) (267)
(W2) 43880 (W3) 2989 (W4) (1944)
Illustration 7
3 products – Product El, Am and En are produced after passing through a distillation process.
In August, 3,000 litres of material were input into the distillation process. Raw material was
purchased at the cost of $5 per litre. Labour costs incurred were $20,000 while $25,000 was
incurred for production overheads.
Total costs = material (3,000l x $5/l) + Labour $20,000 + POH $25,000 = $60,000
At the end of process, 200 litres were lost – this loss rate was as per the expected loss estimated
at beginning of process.
Required
Apportion the joint costs to product El, Am and En using:-
a) Physical unit basis
Products Litre $
El 1,400 30,000
Am 800 17,143
En 600 12,857
Total 2,800 60,000
Workings;
Cost per litre = Total pre-separation costs/Total quantity produced
= $60,000/2,800l
= $21.43/l
Illustration 8
Process A
Input Details
- 1000kgs of raw material at the price of $5 per kg
- Labour costs of $10,000 and production overhead absorption rate at 200% of direct material
costs.
Output Details
- Normal loss of 5% of input. Losses can be scrapped at $3 per kg
- 150kgs of Product BP (By Product) which can be sold at the price of $50 per kg. However, a
further processing is required before selling product BP at a cost of $8 per kg.
- 800kgs of Product A (main product) at the selling price of $120 per kg.
Required
a) Prepare process A account and By Product account.
Process A Account
Kg $ Kg $
Material 1000 5000 Normal Loss (W1) 50 150
Labour 10000 Product BP (W2) 150 6300
POH 10000 Product A (W3) 800 18550
Working
(W1) Normal Loss (5% x 1,000kg) = 50kg
(W2) Product BP
(W3) Product A = Balancing figures ($25,000 - $150 - $6,300)
By Product Account
Kg $ Kg $
Process A 150 6,300 Bank 150 7,500
Further Processing costs 1,200
150 7,500 150 7,500
Product A can be further processed into Product AA and be sold at $150/kg. There will be 15%
loss during further processing. Cost of further processing is $20/kg of input.
b) Should Product A be sold with or without further processing?
Method 1
Incremental sales value $6,000
(Sales after further processing – sales before further processing)
[$150/kg x (800kg x 85%) - $120/kg x 800kg]
Deduct:
Further processing costs ($16,000)
($20/kg x 800kgs)
Method 2
Profit before Further Processing
Sales ($120/kg x 800kgs) $96,000
Deduct:
Production costs ($18,550)
Profit $77,450
Illustration 9 Valeria
Valeria is a manufacturer of product Q. Valeria runs a processing operation and as might be
expected, uses process costing to account for such operations.
An input of 10kgs of material A is required for producing product Q but only 9kg output of
product Q is expected.
In period 1, Valeria input 10kg of A at $9 per kg. Actual output achieved was only 8.5kgs.
In period 2, Valeria input 10kg of A at $9 per kg and found that 9.5kgs of Q was produced.
10 90 10 90
10.5 95 10.5 95
Illustration 10
Joint products Q, R and S are produced at the end of Process C.
In the month of June, the following were input into Process C:-
Material CF 2000 litres @$3 per litre
Labour 1000 hours @ $2 per hour
Production overheads rate @$1 per hour
Normal loss of 5% was expected during input stage. All losses can be scrapped off at the rate of
$1.80 per litre.
At the end of June, the following outputs were achieved, and the respective selling prices
were:-
Output Selling prices
Product Q 1,000 litres $6 per litre
Product R 500 litres $10 per litre
Product S 300 litres $12 per litre
Calculate the profits per unit for each product Q, R and S if joint costs are apportioned using:-
i. Physical measurement method
Process C Account
litre $ litre $
Material CF 2000 6000 Normal Loss 100 180
Labour 2000 Product Q 1000 4642
POH 1000 Product R 500 2321
Product S 300 1393
Abnormal Loss 100 464
Products Litres $
Q 1000 4642
R 500 2321
S 300 1393
Abnormal Loss 100 464
Total 1900 8820
(W1)
Total costs of production – scrapped value = $9000 - $180 = $4.642/kg
Expected output 1900kg
Abnormal loss is valued at this amount 100kg x $4.642/kg
QUESTIONS
1. In process costing ‘Point of separation’ is relevant to which of the following?
A Abnormal losses C Joint products
B Normal losses D Abnormal gains
2. A company discovers, at the end of a process, that abnormal losses had occurred.
At what value would a unit of abnormal loss be recorded in the process account?
A the total cost per unit of normal output
B scrap value
C the direct cost per unit of normal output
D nil value
3. The total production cost of joint products can be apportioned between these products
using which of the following methods?
1. Weight 3. selling prices
2. sales revenue 4. net realisable value
4. A company input 500 kilos of material into a process at a cost of $7,000. As expected it had
to scrap 10% of the input and it sold this for $10 per kilo.
What was the net material cost (to the nearest cents) per kilo of good production?
A $13.00 C $14.44
B $14.00 D $15.56
Total costs of production – scrapped value = $7000 – (500 x 0.1 x $10) = $14.44/kg
Expected output 450kg
5. How should the cost of disposing of normal waste (normal loss) arising in a process be treated,
if the waste has no saleable value (scrapped value)?
A Debited to the process account C Debited to the normal loss account
B Credited to the process account D Credited to the normal loss account
• Normal loss is not given a cost.
• If units of normal loss have no scrap value, their value or cost is nil.
• If units of normal loss have a scrap value, the value of this loss is its scrap value, which is set off against the cost
of the process. In other words, the cost of finished output is reduced by the scrap value of the normal loss.
11. The full production cost of completed units during November was
A $10,400 C $16,800
B $16,416 D $20,520
15. In process costing, if an abnormal loss arises, the process account is generally
A Debited with the scrap value of the abnormal loss units
B Debited with the full production cost of the abnormal loss units
C Credited with the scrap value of the abnormal loss units
D Credited with the full production cost of the abnormal loss units
18. A chemical process has a normal wastage of 10% of input. In a period, 2,500kg of material
were input and there was an abnormal loss of 75kg.
What quantity of good production was achieved? 2500kg – NL (10%x2500kg) – Abnormal 75kg=2175kg
A 2,175kg C 2,325kg
B 2,250kg D 2,475kg
20. Process B had no opening stock. 13,500 units of raw material were transferred in at $4.50.
Additional material at $1.25 per unit was added in process. Labour and overheads were
$6.25 per completed unit and $2.50 per unit incomplete. ($4.5+$1.25+$2.5=$8.25)
If 11,750 completed units were transferred out, what was the closing stock(1750u) in Process B?
A $77,625 C $141,000
B $14,437.50 D $21,000
CWIP = 1750u x $8.25/u = $14,437.50
21. 6,500 kg (Finished goods) of a product were manufactured in a period. There is a normal loss of
20% of the weight of material input.
An abnormal gain of 4% of the material input occurred in the period.
How many kg of material (to the nearest kg) were input to production in the period?
A 5,460 Actual loss = 16% (20 – 4)
B 7,738 Finished goods = 84% 6,500kg
C 8,125 Input = 6,500kgs ÷ 0.84
D 8,553 = 7,738 kgs
23. Products A and B are manufactured in a joint process. The following data is available for a
period:
Joint process costs $30,000
Output: Product A 2,000 kg
Product B 4,000 kg
Selling price: Product A $12 per kg
Product B $18 per kg
What is Product B’s share of the joint process costs if the sales value method of cost
apportionment is used?
A $7,500
B $18,000
C $20,000
D $22,500
Sales value of putput:
Product A 2,000 kg at $12 = $24,000
Product B 4,000 kg at $18 = $72,000
––––––––
$96,000
––––––––
Share of joint process cost – Product B = $30,000 x (72,000 ÷ 96,000)
= $22,500
24. 400 litres of a chemical were manufactured in a period. There is a normal loss of 25% of the
material input into the process. An abnormal loss of 5% of material input occurred in the
period. Actual Output 70%
How many litres of material (to the nearest litre) were input into the process in the period?
A 500 Actual output 70% 400 litres
B 520 Input 400 litres ÷ 0.7 = 571 litres
C 560
D 571
26. In process costing how are abnormal gains accounted for in the process account?
A Credited at the cost per unit of normal output
B Credited at disposal value
C Debited at the cost per unit of normal output
D Debited at disposal value
27. Raw materials costing $12,800 were input to a process during a period. Conversion costs
totalled $18,430. There was no work-in-progress at the beginning of the period and no
process losses during the period. 3,600 units of the product were completed in the period
with 400 units(CWIP) remaining in the process at the end of the period, complete for materials
and with 70% of the conversion costs applied.
What was the production cost per unit?
A $7.81
B $7.95
C $8.05
D $8.68
Material-EU Finished Goods 100% 3,600u
CWIP 100% 400u
Material cost/EU = $12,800/4,000EU = $3.20/eu
28. In a production process the percentage completion of the work-in-progress (WIP) at the end
of a period is found to have been understated.
When this is corrected what will be the effect on the cost per unit and the total value of WIP?
Cost per unit Total value of WIP
A Decrease Decrease
B Decrease Increase
C Increase Decrease
D Increase Increase
29. Products A and B are manufactured jointly. Production costs in the joint process totalled
$102,000 in a period and output was:
Product A 12,000 units (sold at $6.00 per unit) $72,000 $45,900
Product B 22,000 units (sold at $4.00 per unit) $88,000 $56,100
$160,000 $102,000
Joint costs are apportioned on the basis of realisable value.
What share of the joint costs in the period would be apportioned to Product B?
A $40,800
B $45,900
C $56,100
D $66,000
30. 12,000 kg of a material were input to a process in a period. The normal loss is 10% of input.
There is no opening or closing work-in-progress. Output in the period was 10,920 kg.
What was the abnormal gain/loss in the period?
A Abnormal gain of 120 kg Expected output (12,000kg x 0.9) < Actual output 10,920kg
B Abnormal loss of 120 kg =GAIN 120kg
C Abnormal gain of 1,080 kg
Prepared by Jessy Chong 张愫芯 119
CAT – Intermediate Level T4 – Accounting For Costs
32. Completed output from a manufacturing process in a period totalled 5,640 units (Actual output).
There was no work-in-progress at the beginning of the period but 780 units (CWIP), 60%
complete, remained in the process at the end of the period.
What are the equivalent units of the closing work-in-progress?
A 312
B 468 780u × 0.6 = 468u
C 780
D 6,108
33. A manufacturing process had no work-in-progress at the beginning of a period. 20,000 units
(input) of raw material, costing $8.20 per unit, were input to the process in the period. 18,600
(Finished Goods) completed units were transferred out. Conversion costs were $7.65 per
completed unit and $6.12 per incomplete unit. CWIP 1,400u; CWIP cost per unit = $8.20 + $6.12 = $14.32
What was the value of the closing work-in-progress?
A $8,568
B $20,048 1,400u × $14.32 = $20,048
C $22,190
D $30,788
C $12,193
D $15,363
POH = $11,430 ÷ (580 + 3970 + 5170 + 2980) = 0.9
$
WIP 3,170
Material 4,650
Labour 3,970
POH (0.9 x 3970) 3,573
Total 15,363
36. For which costing method is the concept of equivalent units relevant?
A Batch costing
B Job costing
C Process costing
D Service costing
37. Costs incurred in a process totalled $61,600 for a period. 22,000 units of finished product were
manufactured, of which 440 units were rejected. This is the normal level of rejects for the
process. Rejected units are sold for $1.80 per unit.
What was the cost per unit of good output (to the nearest penny)?
A $2.76
B $2.80
C $2.82
D $2.86
Total costs $61,600
Scrapped value (440u x $1.80/u) ($792)
$60,808
÷ Good Output (22,000u – 440u) 21560u
Cost per unit $2.82
38. A process requires the input of a single raw material at the start of the process. There are no
process losses. 10,000 units of the material were input to the process in a period. At the end
of the period, processing was only 75% complete on 800 units of the material. There was no
work-in-progress at the beginning of the period.
What were the equivalent units of production?
Raw material Conversion costs
A 9,400 9,400
B 9,800 9,800
C 10,000 9,400
D 10,000 9,800 [(100%) 9200u + (75% x 800u)]
39. Products X and Y are joint products. The joint process costs for a period, during which 10,000
units of X and 15,000 units of Y were manufactured, were $87,500.
The sales value method is used to apportion the joint process costs. Selling prices are $6.00
per unit for Product X and $8.00 per unit for Product Y.
What is Product X’s share of the joint process costs?
A $29,167
B $35,000
C $37,500
D $43,750
Product Units $/u Sales value Production Cost
X 10,000 6 60,000 29,167
Y 15,000 8 120,000 58,333
40. Costs incurred in a process totalled $216,720 for a period. 24,000 units of finished product
were manufactured including 1,200 units which were rejected (normal loss) on inspection and
disposed of. The level of rejects in the period was normal. Rejects are sold for $2.00 per unit
(Scrap value) .
What was the cost per unit for the process?
A $8.93
B $9.03
C $9.40
D $9.51
Total costs $216,720
Scrap value (1,200u x $2/u) ($2,400)
$214,320
÷ Actual output (24,000u – 1,200u) 22,800u
$9.40/u
42. Are the following statements about joint product cost apportionment TRUE or FALSE?
i. Using the sales value method of cost apportionment, and where there is no further
processing, the gross profit margin of each product will be the same
ii. Using the units of output method of cost apportionment, the joint cost per unit will be
the same for all joint products
Statement 1 Statement 2
A False False
B False True
C True False
D True True
43. A firm uses job costing. Details of the three jobs worked on during a period are:
Job BA Job DC Job FE
$ $ $
Opening work-in-progress 22,760 3,190 –
Direct materials in the period 4,620 11,660 14,335
Direct labour in the period 12,125 10,520 7,695
POH 8,872 8,812
Overheads are absorbed at 40% of prime cost in each period. Jobs DC and FE remained
incomplete at the end of the period.
What is the value of the closing work-in-progress?
A $61,894
44. Costs totalling $4,250 were incurred in a process in a period. 80 units of output were rejected
and destroyed in the period, 20 units more than allowed for as a normal loss, leaving 420
units of good production to be transferred to finished goods.
What is the amount written off as abnormal loss (to the nearest $)?
A $170
B $177
C $193 [$4,250 ÷ (420units good output + 20units abnormal loss)] x 20 units
D $202
46. Conversion costs incurred in a process totalled $71,628 in a period. There was no work-in-
progress at the beginning of the period. 9,000 units (Finished Goods) of product were
completed in the period, leaving 1,000 units (CWIP), 40% complete as to conversion costs, still
in-progress at the end of the period.
What was the conversion cost per unit of production?
A $7.16
B $7.46
C $7.62 $71,628 ÷ [9,000 + (1,000 x 0·4) units]
D $7.96
48. 5,400 units of a company’s single product were sold for total revenue of $140,400. Fixed costs
in the period were $39,420 and net profit was $11,880.
What was the contribution per unit?
A $7.30
B $9.50 Net Profit $11,880 + Fixed Cost $39,420 = Contribution $51,300
C $16.50 Contribution $51,300 ÷ 5,400units = $9.50/u
D $18.70
50. A process produces two joint products, X and Y, with selling prices of $10 per litre and $20
per litre respectively. In a period, joint costs were $56,000 and finished output was:
Illustration 1
Happy Returns Ltd operates a haulage business with three vehicles. The following estimated cost
and performance data are available:
Petrol $0.50 per kilometre on average
Repairs $0.30 per kilometre
Depreciation $1.00 per kilometre, plus $50 per week vehicle
Driver’s wages $300 per week per vehicle
Supervision and general expenses $550 per week
Loading costs $6.00 per tone
During week 26, it is expected that all three vehicles will be used, 280 tonnes will be loaded and
total 3950 kilometres travelled (including return journeys when empty) as shown in the following
table:
Journey Tonnes carried Kilometres Tone-kilometre
(one way) (one way)
1 34 180 6120
2 28 265 7420
3 40 390 15600
4 32 115 3680
5 26 220 5720
6 40 480 19200
7 29 90 2610
8 26 100 2600
9 25 135 3375
280 1975 66325
Required: Calculate the average cost per tone-kilometre for week 26.
$
Petrol $0.50/km x 3950km 1975
Repairs $0.30/km x 3950km 1185
Depreciation ($1/km x 3950km) + ($50 x 3) 4100
Drivers’ wages $300 x 3 900
Supervision 550
Loading $6/t x 280 tones 1680
Total 10390
Illustration 2
The following information is available for a public transport business for a period:
1 2 3
Revenue from passengers ($000) 146.2 293.5 271.9
Number of vehicles 7 12 10
Total vehicle usage (000 kilometres) 56 96 85
Variable operating costs ($ per kilometres) 0.60 0.60 0.56
Service fixed costs ($000) 49.7 85.2 70.7
In addition to the above, general fixed costs are incurred. These include the costs of
management, supervision, and administration and are absorbed into the cost of journeys at a
predetermined rate per kilometre (to three decimal places of a $). The predetermined rate for
the period was based upon:
Budgeted general fixed costs $312,000
Budgeted vehicle usage 233,000 kilometres
General fixed cost per vehicle usage ($312,000 ÷ 233,000km) = $1.339 per km
Calculate the profitability of each of the services provided by the public transport business in
terms of:-
a) Total net profit (to one decimal place of $’000)
Period 1 2 3
Usage (‘000 km) 56 96 85
Revenue 146.2 293.5 271.9
Variable Operating costs (0.60/0.60/0.56) (33.6) (57.6) (47.6)
Contribution 112.6 235.9 224.3
Service Fixed costs (49.7) (85.2) (70.7)
General Fixed costs @ $1.339/km (75) (128.5) (113.8)
Net Profit (12.1) 22.2 39.8
b) Contribution per kilometer (to two decimal places of $) net of variable costs
1 2 3
Contribution 112.6 235.9 224.3
Total vehicle usage (000 kilometres) 56 96 85
Contribution per km $2.01 $2.46 $2.64
c) Contribution per vehicle (to one decimal place of $000) net of all direct service costs.
1 2 3
Contribution 112.6 235.9 224.3
Service Fixed costs (49.7) (85.2) (70.7)
62.9 150.7 153.6
Number of vehicles 7 12 10
Contribution per vehicle $8.99 $12.56 $15.36
QUESTIONS:
1. A hotel has 60 available rooms. Room occupancy was 80% during a 90 day period during
which total costs incurred were $104,976.
Prepared by Jessy Chong 张愫芯 125
CAT – Intermediate Level T4 – Accounting For Costs
What was the cost per occupied room per night in the period?
A $12.44
B $15.55
C $19.44
D $24.30
[$104,976 ÷ (60 x 0.8 x 90)] = 24·30
2. In a 30 day period a restaurant was open for nine hours per day. Costs incurred in the period
totalled $65,124. The following additional information is available:
Number of tables available 15
Number of seats per table 4
Customer turnround 1 hour
Seating occupancy achieved 60%
What was the cost per customer?
A $4.02
B $6.70
C $16.08
D $26.80
[$65,124 ÷ (30 x 9 x 15 x 4 x 0.6 customers)]
3. The cost unit of a transport business with a single vehicle is tonne/kilometre. Total costs were
$4,558 in a week during which the following journeys were made:
Journey Load (tonnes) Distance (kms)
1 5 80
2 7 100
3 3 40
4 5 60
5 4 150
What was the cost per tonne/kilometre in the week?
A $0.44
B $2.15
C $10.60
D $57.57
Question
A passenger transport company operates four coaches, each with a capacity for 25 passengers.
The company operates on two routes with two coaches on each route. Each coach on Route A
completes 12 journeys per day and on Route B 10 journeys per day. The coaches operate for six
days per week and for 52 weeks per year.
The company is analysing performance on each route and has gathered the following route
data for the last 52 weeks:
Route A Route B
Average number of passengers per journey 13 11
Average fare paid per passenger, per journey $2.26 $2.80
Route length per journey (kilometres) 14 19
(b) cost per kilometre on each route (to four decimal places of $);
Cost per kilometre on each route
Route A Route B
Total cost $95,888 $102,019
÷ total kilometres 52,416 (W5) 59,280 (W6)
Cost per kilometre $1.8294 $1.7210
–––––––– –––––––––
Workings:
W5 12 journeys/day x 14 km/journey x 6 days/week x 52 weeks/year
W6 10 journeys/day x 19 km/journey x 6 days/week x 52 weeks/year
Workings:
W7 13 passengers/journey x $2·26/passenger ÷ 14 km/journey
W8 11 passengers/journey x $2·80/passenger ÷ 19 km/journey
Prepared by Jessy Chong 张愫芯 127
CAT – Intermediate Level T4 – Accounting For Costs
The fixed overhead absorption rate is based on the normal capacity of 2,000 units per month.
Assume that the same amount is spent each month on fixed overheads.
Budgeted sales for next month are 2,200 units.
$ $
Selling Price 120
Direct material 22
Direct labour 36
VOH 14 (72)
Contribution 48
x) budgeted sales 2,200u 2,200u
Total contribution 105,600
Total FC (24,000)
Budgeted Profit 81,600
Required:
a) What is the break-even point in units?
= Fixed Costs = $12/u x 2,000u = 500units
Contribution/u $48/u
d) What would be the break-even point if fixed costs were $24,000 but unit variable costs
went up to $80?
= Fixed Costs = $24,000 = 600units
Contribution/u ($120-$80)
Illustration 2
Your company makes and sells a single product.
The details are as follow:
Selling price $24 per unit
Variable cost $18 per unit
Contribution $6 per unit
Budgeted sales for the year are 140,000 units.
Budgeted fixed costs for the year are $800,000.
Required:
(a) Calculate the break-even point in units and $.
= Fixed Costs = $800,000 = 133,333units
Contribution/u $6/u
Notes:
• Break-even is the volume of sales at which the business just ‘break even’
• No PROFIT no LOSS
• Total costs = Total revenues
• Total contribution = Fixed costs
• It shows the minimum volume of sales which must be achieved to avoid making a loss the period
Illustration 3
Liew Blogger Ltd has capital employed of $1million. Its target return on capital employed is 20%
per annum.
ROCE = Net Profit ÷ Capital Employed
0.2 = Net Profit ÷ $1,000,000
Net Profit = $200,000
Liew Blogger Ltd manufactures a standard product ‘H1N1’.
Selling price of ‘H1N1’ = $60 per unit
Variable costs per unit = $20
Annual fixed costs = $100,000
Contribution per unit = $40
Required:
What volume of sales is required to achieve the target profit?
Target Sales Volume = Fixed Costs + Targeted Profit or Target Contribution
Contribution/u Contribution/u
= $100,000 + $200,000
$40/u
= 7500 units
= $100,000 + $200,000
$40/$60
= $450,000
QUESTIONS:
Questions 1 and 2 are based on the following data:
Sales units 128,000
Sales revenue $640,000
Variable costs $384,000
Fixed costs $210,000
7. It is now expected that the variable production cost per unit and the selling price per unit will
each increase by 10%, and fixed costs will rise by 25%.
What will be the new breakeven point, to the nearest whole unit?
$ Per unit
Sales ($6 x 1.1) 6.60
Less: Variable costs ($1.6 x 1.1) 1.76
Contribution 4.84
Total Fixed costs ($4.80 x 1.25 x 10,000) 60,000
8. A company’s breakeven point is 6,000 units per annum. The selling price is $90 per unit and
the variable cost is $40 per unit. What are the company’s annual fixed costs?
A $120 C $300,000
B $240,000 D $540,000
Fixed Costs = Fixed Costs = 6,000units
Contribution/u ($90-$40)/u
9. Z plc makes a single product which it sells for $16 per unit. Fixed costs are $76,800 per month
and the product has a contribution/ sales ratio of 40%. In a period when actual sales were
$224,000, Z plc’s margin of safety, in units, was:
A 2,000 C 14,000
B 12,000 D 32,000
Break-Even ($) = $76,800 ÷ 0.4 = $192,000
10. Which of the following statements about profit-volume graphs is/are correct?
(i) The profit-volume line crosses the x axis at the breakeven point.
(ii) Any point on the profit-volume line above the x axis indicates the profit (as measured
on the vertical axis) at the level of activity.
(iii) The profit-volume line starts at the origin. is fixed cost
C 51.4%
D 56.6%
13. 5,400 units of a company’s single product were sold for total revenue of $140,400. Fixed costs
in the period were $39,420 and net profit was $11,880.
What was the contribution per unit?
A $7.30
B $9.50
C $16.50
D $18.70
Total contributions = Net Profit $11,880 + Fixed Costs $39,420
= $51,300
Contribution per unit = $51,300 ÷ 5,400 units
= $9.50
14. A company manufactures and sells 4,000 units of a product each month at a selling price of
$22 per unit. The prime cost of the product is $11.60 per unit and the monthly overheads are:
$
Variable production 7,200
Variable selling and administration 5,200
Fixed production 16,400
Fixed selling and administration 6,800
What is the product’s gross profit margin (to one decimal place)?
A 6.8%
B 20.5%
C 33.2%
D 59.5%
Contribution per unit = $22 - $11.60
= $10.40
19. A company has a single product. The following budgeted information relates to a period:
Sales units 800,000
Sales revenue $1,000,000
Total variable costs $590,000
Total fixed costs $350,000
Total contribution $410,000
C/S 0.41
What sales revenue (to the nearest $’000) is required to break even?
A $350,000
B $593,000
C $683,000
D $854,000
BE ($) = Fixed Costs ÷ C/S
= $350,000 ÷ 0.41
= $853,659 ~ $854,000
20. Budgeted sales of a company’s single product in a period are 20,000 units, producing a total
contribution of $180,000 at a selling price of $24 per unit. Fixed costs are $6 per unit based on
the budgeted sales quantity. Contribution per unit = $180,000 ÷ 20,000u = $9
What is the budgeted variable cost per unit?
A $3
B $9
C $15
D $18
Selling Price $24
Less: Variable cost SA
Contribution $9
21. A firm makes a single product. Budgets have been prepared for the year ahead and
include production and sales of 60,000 units with a break-even point of 45,000 units.
What is the margin of safety ratio? = [Budget Sales – BE (u)] ÷ Budget Sales x 100%
A 25% = (60,000u – 45,000u) ÷ 60,000u x 100%
B 33% = 25%
C 75%
D 133%
Question 1
A book publisher makes an initial payment of $25,000(Fixed Costs) to authors for each accepted
manuscript, followed by a royalty payment of 15% of the net sales price (0.15 x $12 = $1.80) of each
book sold.
The net sales price of a book, which is the revenue received by the publisher, is the listed selling
price in bookstores less the bookstore margin of 20% of the listed selling price.
A particular book has a listed selling price of $15.00 (Net SP = $15 x 0.8 = $12). Costs incurred on the
book by the publisher (excluding initial and royalty payments to the author) are:
Variable costs per copy $3.20
Total fixed costs $80,000
Required:
(a) Calculate the number of copies of the particular book that need to be sold for the publisher:
Net sales price = $15 × 0.8 = $12
Variable cost per unit = $3.20 + (0.15 × $12) = $5
Contribution per unit = $12 – $5 = $7
Total fixed costs = $80,000 + $25,000 = $105,000
(b) Prepare a profit/volume (P/V) chart for the publisher, relating to the particular book
publication, covering sales up to 25,000 copies.
A P/V chart shows the relationship between the number of units sold and the total profit or loss. To produce a P/V graph
plot two points and join with a straight line.
Points already calculated are:
0 profit/loss 15,000 copies
$35,000 profit 20,000 copies
$70,000 profit 25,000 copies
Y-Values
80
60
40
20
0
-20 0 5 10 15 20 25 30 Y-Values
-40
-60
-80
-100
-120
Question 2
Company A manufactures and sells a single product. The following information is available:
Selling price per unit $60.00
Variable costs per unit $36.00
Fixed costs per period $216,000
Contribution per unit $24.00
BE (u) = Fixed Costs ÷ Contribution/u = $216,000 ÷ $24/u = 9,000u
0 profit/loss 9,000 units
$120,000 profit 14,000 units
Required:
(i) Draw a profit/volume (P/V) chart based on sales up to 14,000 units per period.
(ii) Clearly identify the break-even point, and areas of profit and loss, on the chart.
Y-Values
150
100
50
0
0 2 4 6 8 10 12 14 16
-50 Y-Values
-100
-150
-200
-250
Question 3
A garage operates a vehicle repair service. Space is limited and, although the garage is usually
busy, the owner is concerned about the amount of profit that can be generated.
Question 4
The variable costs per unit of a company’s single product for the period just ended were:
$
Production 120
Non-production 16
The selling price of the product in the period was $200 per unit and the sales revenue required to
break-even was $120,000.
Required:
(a) Calculate for the period just ended:
(i) The contribution/sales ratio;
Contribution/sales ratio
Contribution per unit = 200 – (120 + 16)
= $64
Contribution sales ratio = (64 ÷ 200) x 100%
= 32%
(ii) The total fixed costs.
Total fixed costs
Fixed costs = contribution at break-even point
Therefore $120,000 x 0.32 = $38,400
(b) In the following period it is expected that fixed costs will total $39,000.
Required:
Calculate the required contribution per unit in the following period for the break-even point to
be 500 units.
Contribution per unit = fixed costs ÷ break-even sales units
= $39,000 ÷ 500 units
= $78 per unit
Question 5
The total costs incurred at various output levels, for a process operation in a factory, have been
measured as follows:
Output (units) Total cost ($)
11,500 102,476
12,000 104,730
12,500 106,263
13,000 108,021
13,500 110,727
14,000 113,201
a) Using the high-low method, analyse the costs of the process operation into fixed and
variable components.
Variable cost per unit = ($113,201 – $102,476) ÷ (14,000u – 11,500u)
= $4.29/u
Total Fixed Costs = $113,201 – (14,000u x $4.29/u)
= $53,141
b) Calculate, and comment upon, the break-even output level of the process operation in (a)
above, based upon the fixed and variable costs identified and assuming a selling price of
$10.60 per unit.
Contribution per unit = $10.60 - $4.29
= $6.31
Break-Even (u) = $53,141 ÷ $6.31/u
= 8,422u
c) Calculate the target output level if the company wishes to make a profit of $30,000.
Target Sales Volume = Fixed Costs + Targeted Profit $53,141+$35,000 13,969 copies
Contribution/u $6.31/u
Question 6
A firm makes a single product with a marginal cost (VPC) of $0.15. Up to 10,000 units can be sold
at $0.40 per unit but when the selling price is reduced to $0.30 per unit, total units sold will be
more than 10,000. Fixed costs are $2,500 per period and there is a planned profit of $4,000 per
period.
a) Based on selling price of $0.30, how many units must be made and sold to break even?
Contribution per unit = $0.30 - $0.15
= $0.15
b) Based on selling price of $0.20, how many units must be made and sold to break even?
Contribution per unit = $0.20 - $0.15
= $0.05
BE (u) = $2,500 ÷ $0.05/u
= 50,000u
c) How many units must be made and sold to achieve profit of $4,000 per period?
Target per sales volume = (Fixed costs + Targeted Profit) ÷ contribution/u
= ($2,500+$4,000) ÷ $0.15/u
= 43,333u
d) What is the margin of safety for the period?
MOS (u) = Budgeted Sales – BE (u)
= 43,333u – 16,667u
= 26,667
MOS (%) = [Budgeted Sales – BE (u)] ÷ Budgeted Sales x 100%
= 26,667u ÷ 43,333u x100%
= 61.5%
MOS ($) = MOS (u) x SP/u
= 26,667u x $0.30/u
= $8,000
Question 7
A manufacturing company with a product has the following sales and production results over 3
financial periods:
Period 1 Period 2 Period 3
Sales (‘000 units) 50 60 40
Production (‘000 units) 70 40 60
The selling price per unit has remained at $10, and direct material and direct labour costs per
unit at $5. All manufacturing overheads are absorbed into product cost at predetermined rates
per unit of output. Any over/ under absorbed balances are transferred to profit and loss in the
period in which they arise. Variable manufacturing overhead absorption was predetermined at
a rate of $1 per unit in each period. Fixed manufacturing overheads were expected to be
$180,000 with normal capacity of 60,000 production units a period.
a) Calculate the profit (loss) arose in each of the three periods using marginal costing
approach.
Period 1 2 3
($’000) ($’000) ($’000)
Sales @ $10/u (50/60/40) 500 600 400
COS @ $6/u
Opening 0 120 0
Question 8
B Ltd is investigating the likely sales prospects for next year. The projection is that 75,000 units will
be sold at $10.60 each. The variable costs are $4.20 per unit and the relevant fixed costs are
$220,000.
Contribution ($10.60-$4.20) $6.40; BE (u) [$220,000 ÷ $6.40/u] = 34,375u; MOS% (75,000u – 34,375) ÷ 75,000 = 54.2%;
Profits ($6.40/u x 75,000 - $220,000) = $260,000
Three possible alternatives have been suggested.
- The managing director thinks that more could be sold if the price was reduced by 5%.
SP ($10.60x0.95) = $10.07/u; Contribution = $5.87/u; BE (u) [$220,000÷$5.87/u] = 37,479u;
MOS% (75,000u-37479u) ÷75,000u = 50.03%; Target (u) = ($220k+$260k) ÷ $5.87/u = 81,772u
- The production manager thanks that the price could be increased by 10% with only a small
loss in sales.
SP ($10.60x1.1) = $11.66/u; Contribution = $7.46/u; BE (u) [$220,000÷$7.46/u] = 29,491u;
MOS% (75,000u-29,491u) ÷75,000u = 60.68%; Target (u) = ($220k+$260k) ÷ $7.64/u = 62,827u
- The sales manager proposes that the variable cost should be increased by 20¢ per unit as
commission to sales force, with a consequent saving in fixed costs of $15,000.
VC/u = $4.40/u; Total FC = $205,000; Contribution = $6.20/u; BE (u) [$205,000÷$6.2/u] = 33,065u;
MOS% (75,000u-33,065u) ÷75,000u = 55.91%; Target (u) = ($205k+$260k) ÷ $6.2/u = 75,000u
a) Calculate the levels of sales required under the first two proposals to maintain the projected
profit at its original level before the proposals were considered
b) To show the breakeven point if sales manager’s proposal was accepted and to compare this
with the breakeven point before the proposals were considered.
Question 9
A company would expect to make a profit of $60,600 per period on the sale of 30,000 units of its
single product at the current selling price. Costs are as follows:
$ per unit
Direct materials 3.90
Direct labour 2.08
Variable overhead 0.50
Fixed overhead 3.50
9.98
Fixed overhead costs per unit are based on output of 30,000 units per period.
Total Fixed costs 30,000u x $3.50/u = $105,000
Profit per unit $60,600 ÷ 30,000u = $2.02
Selling Price per unit ($9.98 + $2.02) = $12
Contribution per unit ($2.02 + $3.50) = $5.52
a) Calculate the contribution/sales (C/S) ratio (expressed as a %) and the break-even point (in
sales units).
C/S ratio = ($5.52 ÷ $12) x 100%
= 46%
BE ($) = $105,000 ÷ 0.46
= $228,261
b) Calculate the extra units that would need to be sold to maintain profit at $60,600 per period if
the selling price is reduced by 10% but the unit variable costs and total fixed costs remain
unchanged.
Selling Price per unit $12 x 0.9 = $10.80
Variable cost per unit = $6.48
Contribution per unit = $4.32
Total fixed costs $105,000
Before:
Target per sales volume = ($105,000 + $60,600) ÷ $5.52/u
= 30,000u
After:
Target per sales volume = ($105,000 + $60,600) ÷ $4.32/u
= 38,333u
Question 10
The following details relate to a shop which currently sells 25,000 pairs of shoes annually:
Selling price per pair of shoes $40
Purchase cost per pair of shoes $25
Contribution per pair of shoes $15
Total annual fixed costs:
Salaries $100,000
Advertising $40,000
Other fixed expenses $100,000
Total Fixed Costs $240,000
a) Calculate the breakeven point and margin of safety in number of pairs of shoes sold.
BE (u) = Total Fixed Costs ÷ contribution/u
= $240,000 ÷ $15/u
= 16,000u
MOS (u) = 25,000 – 16,000u
= 9,000u
b) Assume that 20,000 pairs of shoes were sold in a year. Calculate the shop’s net income (or
loss)
Total Contributions 20,000 x $15 $300,000
Total Fixed Costs ($240,000)
Net Profit $ 60,000
c) If a selling commission of $2 per pair of shoes sold were introduced, how many pairs of shoes
would need to be sold in a year in order to earn a net income of $10,000?
Contribution per unit ($15-$2) $13
Target per sales volume = ($240,000+$10,000) ÷ $13/u
= 19,231 pairs
d) Assume that for next year an additional advertising campaign costing $20,000 is proposed,
whilst at the same time selling prices are to be increased by 12%. What would be the
breakeven point in number of pairs of shoes?
Selling price per pair ($40 x 1.12) $44.80
Variable cost per pair ($25+$2) ($27.00)
Contribution per pair $17.80
Total Fixed cost ($240,000+ $20,000) $260,000
The target for next year is that total profit should remain the same as that budgeted for the
current year.
b) Calculate the number of units which the company should produce and sell next year in
order to achieve the target level of profit.
Target per Sales Volume = ($392,000 + $400,000) ÷ $160/u
= 4,950 units
c) Explain, with an example, the term semi-variable (mixed) cost. How would such a cost be
dealt with in undertaking the analysis in (a)?
Total Profit = Total Fixed Costs + (Variable cost per unit x production units)
Illustration 1
A company, currently operating at full capacity, manufactures and sells saucepans at $2 each.
Current volume is 100,000 pans per annum with the following cost structure.
Operating Statement for year $ $
Sales (100,000 at $2) 200,000
Less: Marginal cost
Labour ($0.80 per pan) 80,000
Material ($0.50 per pan) 50,000 (130,000)
Contribution 70,000
Less: Fixed costs (30,000)
Net profit 40,000
Acceptance of this order would incur extra fixed costs of $8,000 per annum for the hire for
additional machinery and the payment of an overtime premium of 20% for the extra direct
labour required.
Should this order be accepted?
Incremental Sales Revenues (30,000 x $1.80) $54,000
Incremental Cost
Material (30,000 x $0.50) $15,000
Labour (30,000 x $0.80 x 1.2) $28,800
Fixed Costs $8,000 ($51,800)
Incremental Profit ($2,200)
The company should accept the order.
Illustration 2
A firm makes 150,000 electric thermostats which sell at $12 each. Their last operating statement
was:
$ $
Sales 1,800,000
Less: Labour ($4.33) 650,000
Materials ($3.50) 525,000 1,175,000
Contribution 625,000
Less: Fixed Costs 450,000
Profit 175,000
A contract has been offered to sell an additional 50,000 thermostats at $10 each. Acceptance
of this contract would increase fixed costs by $50,000, and would mean paying an overtime
premium of 20% for the extra labour required.
However, because of bulk purchasing a discount of 3% could be obtained for all material
purchases.
Prepare a Relevant Cost Statement
Incremental Sales Revenue (50,000 x $10) $500,000
Saving in purchasing cost (150,000 x $3.50 x 0.03) $15,750
$515,750
Incremental cost
Labour (50,000 x $4.33 x $1.2) $260,000
Materials (50,000 x $3.50 x 0.97) $169,750
Fixed costs $50,000 ($479,750)
Incremental Profit $36,000
Illustration 3
An unexpected order has been received for a product for which the labour and machine time
is available and which requires three types of material A, B and C.
Material A
This material is used regularly within the firm for various products. The new order will require
1,500kgs. The present stock is 21,000kgs purchased at $2.50 per kg. The current replenishment
price is $2.65 per kg.
Replacement cost = 1500kg x $2.65/kg $3,975
Material B
1,000kgs of this material are in stock purchased at $0.85 per kg and the new order requires
800kgs. The current replacement price is $0.95 per kg. This material is used on no other product
and recent enquiries revealed that the material in stock could be sold at $0.55 per kg.
Scrap Value (R) = 800kgs x $0.55/kg $440
Material C
5,000kgs are required for the order and large quantities are purchase at $0.18 per kg.
Ordering/Replacement Costs (R) = 5000kg x $0.18/kg $900
What is the relevant cost for decision making purposes of each of the three materials?
Illustration 4
AT Ltd is considering accepting a contract of 400 identical components.
The data relating to the production of each component is as follows:
Material requirements
3kgs material M1 - see note 1 below 1200kgs
2kgs material P2 - see note 2 below 800kgs
1 Part of No. 678 - see note 3 below 400 Part
Note 1:
Material M1 is in continuous use by the company. 1,000kgs are currently held in stock at a book
value of $4.70 per kg but it is known that future purchases will cost $5.50 per kg.
Future Purchasing costs (1200kgs x $5.50/kg) $6600
Note 2:
1,200kgs of Material P2 are held in stock. The original cost of this material was $4.30 per kg but as
the material has not been required for the last two years it has been written down to $1.50 per
kg scrap value. The only foreseeable alternative use is as substitute for material P4 (in current use)
but this would involve further processing costs of $1.60 per kg. The current cost of material P4 is
$3.60 per kg. (Saving in $2 per kg if we make) vs scrap value $1.50 per kg
800kgs x $2/kg $1,600
Note 3:
It is estimated that the Part No.678 could be bought for $50 each.
400 Part x $50 $2,000
What is the relevant cost for decision making purposes of each of the three materials?
Illustration 5
SOS has been offered a contract to manufacture 500 units of Component SUS. Labour
requirements are:
Each component would require five hours of skilled labour. An employee possessing the
necessary skills is available and is currently paid $5 per hour. A replacement would, however,
have to be obtained at a rate of $6 per hour for the work which would otherwise be done by
the skilled employees. 500u x 5hours x $6/hr $15,000
Each component would require five hours of semi-skilled labour. The current rate for semi-skilled
work is $3 per hour and an additional employee could be appointed for this work. 500u x 5hours x
$3/hr $7500
Determine the relevant labour cost for the contract.
Illustration 6
Grandy Ltd needs to increase production of GRANDIE by 1,800 units to meet the order of a
regular customer.
In considering its manpower capacity, management found out that additional labour cannot
be recruited.
Therefore, to produce the additional 1,800 units of GRANDIE, direct labour have to be
transferred from production of an existing product which is sold for $90 and which has a
budgeted manufacturing cost as follows:
$
Direct material 10
Direct labour (8 hours at $3 per hour) 24
Variable overhead (8 hours at $2 per hour) 16
Fixed overhead (8 hours at $5 per hour) 40
Contribution ($90-$50) $40
Contribution per LF $5/hr
Labour hours required (1800u x 4hrs) 7,200hours
Contribution lost (7,200 hours x $5/hr) $36,000
Currently, to produce 1 unit of GRANDIE, 4 labour hours are required and the labour is paid at $3
per hour. 1800u x 4hours x $3 $21,600
Determine the incremental labour cost incurred to complete the increased production of
GRANDIE.
Incremental labour cost $21,600
Contribution lost $36,000 $57,600
Illustration 7
A company has just secured a new contract which requires 500 hours of labour.
There are 400 hours of spare labour capacity. The remaining hours could be worked as overtime
at time and a half of labour ($12 x 1.5 = $18) could be diverted from the production of product X.
Product X currently earns a contribution of $4 in two labour hours (contribution per LF = $2/hr) and
direct labour is currently paid at a rate of $12 per normal hour ($12 + $2 = $14). Whichever lower?
What is the relevant cost of labour for the contract?
100 hours x $14 = $1400
Illustration 8
TRANS-CO absorbs overhead by machine hour rate, currently at $20 per hour of which $7 is for
variable overhead and $13 for fixed overhead. If a special contract is undertaken it is estimated
that fixed costs will increase for the duration of the contract by $3,200.
Illustration 9
A research project undertaken on behalf of a client has already incurred costs of $200,000. It is
estimated that the project will be completed in one year’s time.
Overheads:
Plant and equipment costing $80,000 was bought at the commencement of the project, and a
second year’s depreciation charge of $40,000 is estimated. The plant and equipment is highly
specialised and has no other use.
Estimated scrap values: Now $10,000
In one year $4,000
Calculate the relevant overheads incurred if the project is completed one year from now.
Stop NOW $10,000
Continue $4,000 Reduction in scrap value $6,000
Illustration 10
A product is made on a special milling machine. It uses 20 minutes of machine time. The
product has a selling price of $12 and a total marginal cost of $8.
Contribution $4; Contribution/LF $0.2/min
The milling machine can also be used to make a component (used elsewhere in the firm) taking
30 minutes with a total marginal cost of $7. The component could be bought in at a price of
$12. Contribution $5; Contribution/LF $0.167/min
Currently the capacity of the milling machine is insufficient to meet all production requirements
in the factory.
Should the component be made or purchased? Made
The decision has to be made when the company has 2 options to complete a product ~ produce (make) or purchase
(buy).
From the cost point of view, company will choose the option that minimises the costs.
Therefore, the relevant production costs and purchase costs will be considered.
Illustration 11
The management of Summer plc is considering next year’s production and purchase budgets.
One of the components produced by the company, which is incorporated into another product
before being sold, has a budgeted manufacturing cost as follows:
$/u
Direct material 14
Direct labour (4 hours at $3 per hour) 12
Variable overhead (4 hours at $2 per hour) 8
Fixed overhead (4 hours at $5 per hour) 20
54
Variable Production cost ($14+$12+$8) $34
Turnip plc has offered to supply the above component at a guaranteed price of $50 per unit.
a) Considering cost criteria only, advise management whether the above component should
be purchased from Turnip plc. Saving if made $16
b) Explain how your above advice would be affected by each of the two SEPARATE situations
shown below. All calculations must be shown.
i. As a result of recent government legislation if Summer plc continues to manufacture
this component the company will incur additional inspection and testing expenses of
$56,000 per annum, which are not included in the above budgeted manufacturing
costs
ii. Additional labour cannot be recruited and if the above component is not
manufactured by Summer plc, the direct labour released will be employed in
increasing the production of an existing product which is sold for $90 and which has
a budgeted manufacturing cost as follows: contribution per LF $40/8hr = $5/hr
$
Direct material 10
Direct labour (8 hours at $3 per hour) 24
Variable overhead (8 hours at $2 per hour) 16
Fixed overhead (8 hours at $5 per hour) 40
Variable Production $34 + Opp. Cost (4hrs x $5) $20 = $53 ~ Buying costs $50
Cheaper to buy
Illustration 12
A company, which manufactures four components (A, B, C and D) using the same machinery,
aims to maximise profit. The following information is available:
Component
A B C D
Variable production cost per unit ($) 60 64 70 68
Purchase cost per unit from an outside supplier ($) 100 120 130 110
Saving if made 40 56 60 42
Machine hours per unit to manufacture 4 7 5 6
Saving per Mhrs 10 8 12 7
Priority to buy 3 2 4 1
As it has insufficient machine hours available to manufacture all the components required, the
company will need to buy some units of one component from the outside supplier.
Which component should be purchased from the outside supplier?
Illustration 13
CURVE Ltd has been asked to quote a price for a one-off contract. The company’s
management accountant has asked for your advice on the relevant costs for the contract. The
following information is available:
Materials
The contract requires 3,000 kg of material K, which is a material used regularly by the company
in other production. The company has 2,000 kg of material K currently in stock which had been
purchased last month for a total cost of $19,600 ($9.80/kg). Since then the price per kilogram for
material K has increased by 5%. 3000kg x $9.80/kg x 1.05= $30,870
The contract also requires 200 kg of material L. There are 250 kg of material L in stock which are
not required for normal production. This material originally cost a total of $3,125. If not used on
this contract, the stock of material L would be sold for $11 per kg. Scrap value 200kg x $11 = $2,200
Labour
The contract requires 800 hours of skilled labour. Skilled labour is paid $9.50 per hour. There is a
shortage of skilled labour and all the available skilled labour is fully employed in the company in
the manufacture of product P. The following information relates to product P:
$ per unit $ per unit
Selling price 100
Less
Skilled labour (4hours) 38
Other variable costs 22
(60)
40
Contribution per hours ($40/4hr) $10/hrs
Labour cost (800hrs x $9.50/hr) $7,600
Opp. cost (800 hours x $10/hr) $8,000 $15,600
a) Prepare calculations showing the total relevant costs for making a decision about the
contract in respect of the following cost elements:
i. Materials K and L; and
ii. skilled labour
Illustration 14
Mike Limited has been asked to quote a price for a one off contract. Management have drawn
up the following schedule:
$
Contract price (cost plus 20%) 60,780
Costs:
Materials: V (300 kg at $10/kg) 3,000
Materials: I (1,000 litres at $7/litre) 7,000
Materials: C (550 kg at $3/kg) 1,650
Labour: Department 1 (1,500 hours at $8/hour) 12,000
Labour: Department 2 (2,000 hours at $10/hour) 20,000
Overheads: absorbed on a budgeted labour hour basis (3,500 hours at $2/labour hour) 7,000
Total costs 50,650
Illustration 15
CES specialises in providing contract services to the electricity supply industry. Powerco plc has
asked CES to submit a tender to overhaul one of the four steam turbines in its Derwent power
station. The work is scheduled to take place in three months’ time, when the demand for
electricity will be low.
Labour
Task Skill level required Number of Number of days
workers
(i) Strip down and rebuild fitter $100 6 8
(ii) Overhaul turbine fitter 4 19
engineer $210 5 19
(iii) Test and commission engineer 2 4
Each fitter costs $100 per day and the engineers $210 per day.
Each of the three tasks has to be completed before the next task can commence.
Materials
Total material requirement has been estimated at a stores issue price of $57,800. In pricing for
tenders, CES apply a mark-up to the stores’ issue price of plus 20%.
Additional information
At the time of the contract, CES will only have three fitters available. The remaining fitters will
have to be hired from an employment agency at a rate of $150/ day, plus travelling expenses
at the rate of $30/ day.
Two of the engineers required for the overhaul stage, are on secondment to another contractor
at a rate of $400 per day. They can be recalled from this contract, subject to written notice.
Included in the cost of materials is $19,000 which relates to bearing sets bought three years ago
for a similar job which was cancelled. It is the contract manager’s view that these components
are unlikely to be used elsewhere, as almost all other power stations now use an upgraded
bearing specification. All other materials are in constant usage and no price changes are
envisaged in the near future.
Prepare a tender for submission to Powerco plc on EACH of the following assumptions:
i. that there are no constraints on worker availability and the contract can therefore be
based on CES’s normal pricing policy
ii. that CES is keen to start dealing with Powerco plc and the managing director is prepared
to submit a tender based on the lowest relevant cost to CES, after the circumstances
mentioned in note 5 above have been taken into consideration.
Illustration 16
Camden has three divisions. Information for the year ended 30 September is as follows:
Division A Division B Division C Total
Illustration 17
A company has three branches (X, Y and Z) to which the following budgeted information relates:
Branch X Branch Y Branch Z Total Revised Profit
$000 $000 $000 $000
Sales 200 200 200 600 400
Contribution 60 50 20 130 110
Less: Fixed costs (35) (35) (30) (100) (100)
Profit/(loss) 25 15 (10) 30 10
60% of the total fixed costs are general irrelevant overheads. General overheads are apportioned
to the branches on the basis of sales value. The other fixed overheads are (40%) specific relevant
to each branch and are avoidable if a branch is closed.
If branch Z is closed down and the sales of the other two branches remained the same, what
would be the revised budgeted profit for the company?
Branch X Branch Y Branch Z
$000 $000 $000
Sales 200 200 200
Contribution 60 50 20
Less: Fixed costs (14) (14) (12)
Profit/(loss) 46 36 8
continue Continue Continue
Actually three branches should be continue.
Illustration 18
A company manufactures and sells two products (X and Y) both of which utilise the same skilled
labour. For the coming period, the supply of skilled labour is limited to 2,000 hours. Data relating
to each product are as follows:
Product X Y
Selling price per unit $20 $40
Variable cost per unit $12 $30
Contribution per unit $8 $10
Skilled labour hours per unit 2 4
Contribution per labour hour $4/hr $2.5/hr
Maximum demand (units) per period 800 400
Prepared by Jessy Chong 张愫芯 150
CAT – Intermediate Level T4 – Accounting For Costs
Priority to manufacture 1 2
Allocate the labour hours available 1,600 hours 400 hours
Units can be produced 800 units 100 units
In order to maximise profit in the coming period, how many units of each product should the
company manufacture and sell?
Illustration 19
A company produces three products which have the following details:
Product
I II III
Per unit Per unit Per unit
Direct materials (at $5/kg) 8 kg 5 kg 6 kg
Contribution per unit $35 $25 $48
Contribution per kg of material $4.375 $5 $8
Demand (excluding special contract) (units) 3,000 5,000 2,000
The company must produce 1,000 units of Product I for a special contract before meeting
normal demand. Unfortunately there is only 35,000 kg of material available.
What is the optimal production plan?
Step 1 Checking
Product Kg/u Demand Kgs
1 8 3,000 24,000
2 5 5,000 25,000
3 6 2,000 12,000
Total mat. Required 61,000
Total mat. Available (35,000)
Shortage 26,000
Illustration 20
A company uses limiting factor analysis to calculate an optimal production plan given a scarce
resource.
QUESTIONS:
1. The following statements relate to relevant cost concepts in decision making:
(i) Materials can never have an opportunity cost whereas labour can.
(ii) The annual depreciation charge is not a relevant cost.
(iii) Fixed costs would have a relevant cost element if a decision causes a change in their
total expenditure
Which statements are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
2. A company is evaluating a project that requires 4,000 kg of a material that is used regularly
in normal production.
2,500 kg of the material, purchased last month at a total cost of $20,000 (at $8/kg), are in stock.
Since last month the price of the material has increased by 2½%.
What is the total relevant cost of the material for the project? 4,000kgs x $8 x 1.025
A $12,300 C $32,300
B $20,500 D $32,800
3. A company manufactures two products (L and M) using the same material and labour. It
holds no stocks. Information about the variable costs and maximum demands are as follows:
Product L Product M
$/unit $/unit
Material ($4 per litre) 13 (3.25kg) 19 (4.75kg)
Total material required 57,500 19,500 38,000
Labour ($7 per hour) 35 (5kg) 28 (4kg)
Total labour hours required 62,000 30,000 32,000
Units Units
Maximum monthly demand 6,000 8,000
Each month 50,000 litres of material and 60,000 labour hours are available.
Which one of the following statements is correct?
A Material is a limiting factor but labour is not a limiting factor.
B Material is not a limiting factor but labour is a limiting factor.
C Neither material nor labour is a limiting factor.
D Both material and labour are limiting factors.
4. A company manufactures and sells a single product. The variable cost of the product is
$2.50 per unit and all production each month is sold at a price of $3.70 per unit. A potential
new customer has offered to buy 6,000 units per month at a price of $2.95 per unit. The
company has sufficient spare capacity to produce this quantity. If the new business is
accepted, sales to existing customers are expected to fall by two units for every 15 units sold
to the new customer.
What would be the overall increase in monthly profit which would result from accepting the
new business?
Contribution earned ($2.95-$2.50) 6,000 $2700
Contribution lost ($3.70-$2.50) 6,000/15u x 2 ($960) $1740
5. A company manufactures four components (L, M, N and P) using the same general purpose
machinery. Weekly demand is 1,500 units of each component but only 24,000 machine
hours are available each week. A decision has to be made on which component to buy in
from an outside supplier. The following data are available:
L M N P
Variable production cost ($ per unit) 45 40 30 20
General purpose machinery hours per unit 1 3 5 4 6
Purchase price from outside supplier ($ per unit) 57 55 54 50
In order to minimise total cost, which component should be purchased from the outside
supplier each week?
L M N P
Variable production cost ($ per unit) 45 40 30 20
Purchase price from outside supplier ($ per unit) 57 55 54 50
Saving if we make 12 15 24 30
Machine hours 3 5 4 6
Saving per Mhr 4 3 6 5
Priority to Make 3 4 1 2
Priority to buy 2 1 4 3
6. A company is evaluating a project that requires two types of material (T and V).
Data relating to the material requirements are as follows:
Material Quantity Quantity Original cost of Current Current
type needed for currently in quantity in stock purchase resale
project stock price price
Kg Kg $/kg $/kg $/kg
T 500 100 40 45 44
V 400 200 55 52 40
Material T is regularly used by the company in normal production. Material V is no longer in use
by the company and has no alternative use within the business.
What is the total relevant cost of materials for the project?
A $40,400 C $43,400
B $40,900 D $43,900
Material T 500kgs x $45
Material V 200kgs x $55 + 200kgs x $52
7. A machine owned by a company has been idle for some months but could now be used on
a one year contract which is under consideration. The net book value of the machine is
$1,000. If not used on this contract, the machine could be sold now for a net amount of
$1,200. After use on the contract, the machine would have no saleable value and the cost
of disposing of it in one year’s time would be $800.
What is the total relevant cost of the machine to the contract? $1200 - $800
A $400 C $1,200
B $800 D $2,000
8. All of a company’s skilled labour, which is paid $8 per hour, is fully employed manufacturing
a product to which the following data refer:
$ per unit $per unit
Selling price 60
Less Variable costs: Skilled labour @2.5hrs 20
Others 15 (35)
Contribution 25
The company is evaluating a contract which requires 90 skilled labour hours to complete. No
other supplies of skilled labour are available. Contribution per hour = $25/2.5 = $10/hr
What is the total relevant skilled labour cost of the contract?
A $720
B $900
C $1,620
D $2,160
90hrs x $8 + $10 x 90hrs = $1620
9. A company requires 600 kg of raw material Z for a contract it is evaluating. It has 400 kg of
material Z in stock which were purchased last month. Since then the purchase price of
material Z has risen by 8% to $27 per kg. Raw material Z is used regularly by the company in
normal production. 600kgs x $27 = $16,200
What is the total relevant cost of raw material Z to the contract?
A $15,336
B $15,400
C $16,200
D $17,496
13. Hamilton Company is faced with a make-or-buy decision. Hamilton should agree to buy the
part from a supplier provided the price is less than Hamilton’s
A total costs
B variable production costs plus avoidable fixed production costs
C total manufacturing costs
D variable costs
14. A company manufactures and sells four products. Sales demand cannot be met owing to a
shortage of skilled labour. Details of the four products are:
Product A Product B Product C Product D
Sales demand (units) 1,500 2,000 1,800 1,900
Contribution ($/unit) 2.80 2.60 1.90 2.40
Contribution/ sales (%) 30 40 50 45
Skilled labour (hours/unit) 1.4 1.2 0.9 1.0
In what order should the products be made in order to maximise profit?
A Product A, Product B, Product D, Product C
B Product B, Product D, Product C, Product A
C Product C, Product D, Product B, Product A
D Product D, Product B, Product C, Product A
Product A Product B Product C Product D
Contribution per unit $2.80 $2.60 $1.90 $2.40
Skilled labour hours* 1.4 1.2 0.9 1.0
Contribution/skilled labour hour $2.00 $2.17 $2.11 $2.40
Priority 4th 2nd 3rd 1st
(*skilled labour hours = limiting factor)
15. Steeple Chairs Ltd manufactures a range of components and products. Budgeted data for
three of these are shown below:
Product PQ ($) Product RS ($) Component Z ($)
Variable cost 15 32 21
Fixed overhead 8 9 10
23 41 31
Components Z can be purchased from an external supplier for $30 per unit. The 7,000 units of Z
must be either produced or purchased externally.
What is the profit maximising production budget?
Product PQ Product RS Component Z
A None 2,000 units 7,000 units
B None 4,000 units 4,000 units
C 5,000 units 4,000 units 250 units
D 5,000 units None 6,250 units
16. A company manufactures and sells four types of component. The labour hours available for
manufacture are restricted but any quantities of the components can be bought-in from an
outside supplier in order to satisfy sales demand. The following further information is provided:
Component
A B C D
Prepared by Jessy Chong 张愫芯 155
CAT – Intermediate Level T4 – Accounting For Costs
17. A company manufactures and sells four products. Details are as follows:
Product
P Q R S
$ $ $ $
Contribution per unit 16.0 14.5 17.6 19.0
Net profit per unit 4.6 4.8 5.2 5.0
Contribution per machine hour 5.0 4.8 4.4 3.8
Net profit per machine hour 1.4 1.6 1.3 1.0
Machine hours available in the next period will not be sufficient to meet production
requirements. There are no product-specific fixed costs.
What should be the order of priority for production in order to maximise profit?
A Product P, Product Q, Product R, Product S
B Product Q, Product P, Product R, Product S
C Product R, Product S, Product Q, Product P
D Product S, Product R, Product P, Product Q
Question 1 Wakehurst
Wakehurst is about to tender for a one off contract. Requirements for this contract have been
established:
$
Labour: Skilled workers (100 hours at $9/hour) 900
Semi skilled workers (200 hours at $5/hour) 1,000
Management (20 hours at $20/hour) 400
Materials: N (100 litres at $4.50/litre) 450
T (300kg at $7/kg) 2,100
4,850
The skilled workers will be diverted from production of product P with resulting loss of sales. Each
unit of P generates a contribution of $7 and takes two skilled labour hours to make contribution lost
(100hrs/2hrs x $7= $350). Semi skilled workers will be hired as required incremental cost (200hrs x $5/hr =
$1,000). The management cost represents an allocated amount for hours expected to be spent
(non incremental). At the moment the management team has spare capacity.
Current stocks of material N are 200 litres and it is in continuous use by the business. It cost
$4.50/litre originally but new supplies now cost $4.00/litre (replacement cost = 100 x $4 = $400) due to
improved negotiating by the purchasing department. It could be sold as scrap for $2/litre.
The current stocks of material T are 200kg did cost $7/kg some years ago but has not been used
by the business for some time. If not used for the contract it would be scrapped for $4/kg (scrap
value = 200kg x $4/kg = $800). The current purchase price is $8/kg.
i. What is the relevant cost of labour?
Skilled labour: wages (100 x 9) 900
Contribution lost (100 x 3.5) 350
Semi skilled labour: incremental (200 x 5) 1000
2250
a) Recommend what action XYZ Ltd should take with the 4,000 defective units.
If corrected:
Incremental cost: 3.00
If not corrected:
Incremental cost (revenue lost): 4.50 (原本可以卖的$7, 现在卖$2.50, 少赚$4.50)
b) If by reworking the defective units, another batch of 4,000 units would have to be foregone,
state how your advice to XYZ Ltd might change.
If corrected:
Incremental gain from correction: 1.50 x 4000 6,000
Incremental cost (another 4000u): 2.87 x 4000 11,480 (contribution lost)
Net loss 5,480
∴ Should not correct
Question 4
Two decision making problems are faced by a company which produces a range of products
and absorbs production overhead using a rate of 200% of direct wages. This rate was
calculated from the following budgeted figures:
$
Variable production costs 64,000
Fixed production costs 96,000
Direct labour costs 80,000
Problem 1
The normal selling price of Product X is $22 and production cost for one unit is:
$
Raw materials 8
Direct labour 4
Production overhead 8
20
There is possibility of supplying a special order for 2,000 units of Product X at $16 each. If the
order were accepted the normal budgeted sales would not be affected by the company has
the necessary capacity to produce the additional units.
Problem 2
The cost of making component Q, which forms part of Product Y, is stated below:
$
Raw materials 4
Direct labour 8
Production overhead 16
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28
Direct material 5 6 8 6
Direct labour 4 4 8 8
Variable overhead 3 3 6 6
Fixed overhead * 8 8 16 16
Profit 8 9 7 6
Labour hours 1 1 2 2
Machine hours 4 3 4 5
$ $ $
Selling price per unit 15 22 26
Direct materials per unit 3 5 6
Direct labour per unit 4 6 7
Variable factory overhead per unit 6 8 8
Calculate how many units of each type of clock must be manufactured to maximise profit and
calculate that profit.
Illustration 1
An expenditure of $3 million is expected to generate cash inflows of $800,000 each year for the
next seven years.
What is the payback period for the project?
If Constant Annual Cash flows, then the payback period is calculated simply as:
6 800 1,800
7 800 2,600
Illustration 2
A project will involve spending $2.8 million now. Annual cash flows from the project would be
$500,000.
What is the expected payback period?
Payback Period = Initial payment ÷ Annual cash inflow
= $2,800,000 ÷ $500,000
= 5.6 years or 5 years 7.2 months
Illustration 3
An investment would cost $2.3 million and annual cash inflows from the project are expected to
be $600,000.
Required:
Calculate the expected payback period in years and months.
Payback Period = Initial payment ÷ Annual cash inflow
= $2,300,000 ÷ $600,000
= 3.833 years or 3 years 10 months
Illustration 4
A project is expected to have the following cash flows.
Year Cash Flow Cumulative cash flow
($’000)
($’000)
0 (2,000) (2,000)
1 500 (1,500)
2 600 (900)
3 300 (600)
4 400 (200)
5 600 400
6 500 900
What is the expected payback period?
Payback is between the end of Year 4 and the end of the Year 5 – in other words during Year 5.
If we assume a constant rate of cash flow through the year, we could estimate that payback will be 4 years, plus
(200/600) of Year 5.
We could therefore estimate that payback would be after 4.333 years or 4 years 4 months.
Illustration 5
A project has the following cash flows.
Year Cash Flow Cumulative cash flow
($’000)
($’000)
0 (1,900) (1,900)
1 300 (1,600)
2 500 (1,100)
3 600 (500)
4 800 300
5 500 800
Illustration 6
Calculate the payback period in years and months for the following project.
Year Cash Flow Cumulative cash flow
($’000)
($’000)
0 (3,100) (3,100)
1 1,000 (2,100)
2 900 (1,200)
3 800 (400)
4 600 200
5 500 700
Payback is between the end of Year 3 and the end of the Year 4 – in other words during Year 4.
If we assume a constant rate of cash flow through the year, we could estimate that payback will be 3 years, plus
(400/600) of Year 4.
We could therefore estimate that payback would be after 3.667 years or 3 years 8 months.
Illustration 7
A man invests $150 on 1 January each year. On 31 December simple interest is credited at 11%
but this interest is put in a separate account and does not itself earn any interest. Find the total
amount standing to his credit on 31 December following his fifth payment of $150.
Year (1 Jan) Investment ($) Interest (31 December)
1 150 0.11 x 160 = 17.60
2 150 +150 = 300 0.11 x 300 = 33.00
3 150 + 300 = 450 0.11 x 450 = 49.50
4 150 + 450 = 600 0.11 x 600 = 66.00
5 150 + 600 = 750 0.11 x 750 = 82.50
Total 248.80
Total investment amount at 31 December, Year 5:- $__998.60__
= $750 + $248.80 (principal + simple interest)
If Sujata invest for 5 years, how much will be received at the end of the life of the investment?
I = PRT = ($8,500 x 0.02 x 5 years) = $850
100
Illustration 9
Determine the total sum at the end of the investment period
Principal Interest rate Investment period Annual interest Total sum receivable
sum ($’000) ($’000)
$120,000 8% per annum 2 years $120 x 0.08 x 2yrs = $19.20 $120 + $19.20 = 139.20
$120,000 9% per annum 2 years $120 x 0.09 x 2yrs = $21.60 $120 + $21.60 = $141.60
$120,000 10% per annum 2 years $120 x 0.1 x 2yrs = $24.00 $120 + $24 = $144.00
$120,000 10% per annum 2 years 5 months $120 x 0.1 x 5/12 + $24 = $29 $120 + $29 = $149.00
$120,000 10% per annum 2 years 9 months $120 x 0.1 x 9/12 + $24 = $33 $120 + $33 = $153.00
COMPOUND INTEREST
With compound interest, the interest earned is added to the principal before interest is calculated for the next year.
Interest earned:
I = Pxrxn
I : Interest
P : Principal
r : Rate of interest (usually per annum)
n : Number of periods (usually in years)
Illustration 10
$2,000 is invested for four years and interest of 8% is earned each year. What is the value of the
investment at the end of Year 5?
Year Opening Investment ($) Interest ($) Closing investment ($)
1 2,000 2,000 x 8% = 160 2,160.00
2 2,160 2,160 x 8% = 172.80 2,332.80
3 2,332.80 2,332.80 x 8% = 186.62 2,519.42
4 2,519.42 2,519.42 x 8% = 201.55 2720.97
5 2720.97 2,720.97 x 8% = 217.68 2,938.65
OR
S = P x (1 + r) n
Year 1 = 2,000 x (1 + 0.08) 1 = $2,160.00
Year 2 = 2,000 x (1 + 0.08) 2 = $2,332.80
Year 3 = 2,000 x (1 + 0.08) 3 = $2,519.42
Year 4 = 2,000 x (1 + 0.08) 4 = $2720.97
Year 5 = 2,000 x (1 + 0.08) 5 = $2,938.65
Illustration 11
Principle : $10,000
Interest rate : 10% per annum
Investment Period : 5 years
Calculate sum received at the end of each year.
Year Opening Investment ($) Interest ($) Closing investment ($)
1 10,000 10,000 x 10% = 1,000 11,000
2 11,000 11,000 x 10% = 1,100 12,100
3 12,100 12,100 x 10% = 1,210 13,310
4 13,310 13,310 x 10% = 1,331 14,641
5 14,641 14,641 x 10% = 1,464.1 16,105.1
OR
S = P x (1 + r) n
Year 1 = 10,000 x (1 + 0.1) 1 = $11,000
Year 2 = 10,000 x (1 + 0.1) 2 = $12,100
Year 3 = 10,000 x (1 + 0.1) 3 = $13,310
Year 4 = 10,000 x (1 + 0.1) 4 = $14,641
Year 5 = 10,000 x (1 + 0.1) 5 = $16,105.1
Illustration 12
Interest compounding Principal NR (%) Annual Interest APR (%)
Yearly basis 10,000 10% 10,000 x 10.% = 1,000 10%
Quarterly basis 10,000 10% 10,000 x 10.4% = 1,040 (1+0.025) - 1 = 10.4%
Monthly basis 10,000 10% 10,000 x 10.47% = 1,047 (1+0.0083)12 - 1 = 10.47%
Weekly basis 10,000 10% 10,000 x 10.51% = 1,051 (1+0.0019)52 - 1 = 10.51%
Daily basis 10,000 10% 10,000 x 10.52% = 1,052 (1+0.0027)365 - 1 = 10.52%
Illustration 13
a) It is estimated that a particular cost will increase by 5% per annum on a compound basis. If
the cost now is $10,000, by the end of Year 4, the cost will be:
Compounding
Conversion of data from present to future
Determine future value from a known present value
FV = PV x (1 + r) n
FV : Future Value
PV : Present Value
FV = $10,000 x (1 + 0.05)
= $12,155
b) A house was valued at $90,000 at the end of Year 1. The price has been rising at 21% per
annum. What was the value of the house at the start of the year?
Discounting
Conversion of data from future to present
Determine present value from a known future value
FV
PV =
(1 + r) n
FV : Future Value
PV : Present Value
PV = $9,000 ÷ (1 + 0.21)1
= $7480
Annuities
A regular payment or receipt of the same (constant) amount for all the years.
PV of annuity = Annuity x Annuity factor
Illustration 14
An investment will generate revenue of $10,000 each year for 3 years with the first receipt at the
start of year 1. Calculate the present value for the 3 years annuity based on a discount rate of
10%.
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Approach 1:
Year Cash flow Discount factor Present value
1 $10,000 1/(1.10) $9,091
2 $10,000 1/(1.10)² $8,264
3 $10,000 1/(1.10)³ $7,513
$24,868
Approach 2:
Year Cash flow Annuity factor Present value
1–3 $10,000 1/(1.10) + 1/(1.10)² + 1/(1.10)³ = 2.48685 $24,868
Illustration 15
What is the present value of a perpetual annuity of $500 p.a. at 10%?
Per petuities
Present value of annuities which are expected to continue for an indefinitely long period of time.
PV of perpetuity = Annuity ÷ Interest rate
Illustration 16
Investment AB requires an initial investment of $150,000.
It is expected to generate annual cash inflow of $30,000 for 5 consecutive years.
The cost of capital (or the rate of return) is 10%.
Determine the net present value for the investment.
Year Cash Flow ($) Discounted Factor at 10% Present Value
0 (150,000) 1.000 (150,000)
1 30,000 0.909 27,270
2 30,000 0.826 24,780
3 30,000 0.751 22,530
4 30,000 0.683 20,490
5 30,000 0.621 18,630
Net Present Value (36,300)
The PV of cash outflows exceeds the PV of cash inflows by $36,600. Therefore, it should not be undertaken.
Illustration 17
Investment AB requires an initial investment of $150,000.
It is expected to generate annual cash flow of:
Year 1 Year 2 Year 3 Year 4 Year 5
$30,000 $40,000 $60,000 $80,000 ($20,000)
The cost of capital (or the rate of return) is 10%.
Determine the net present value for the investment.
Year Cash Flow ($) Discounted Factor at 10% Present Value
0 (150,000) 1.000 (150,000)
1 30,000 0.909 27,270
2 40,000 0.826 33,040
3 60,000 0.751 45,060
4 80,000 0.683 54,640
5 (20,000) 0.621 (12,420)
Net Present Value (2,410)
The PV of cash outflows exceeds the PV of cash inflows by $2,410. Therefore, it should not be undertaken.
Illustration 18
An investment has the following expected cash flows over its economic life of three years:
Year $
0 (142,700)
1 51,000
2 62,000
3 73,000
Calculate the net present value (NPV) of the project at discount rates of 0%, 10% and 20%.
Year Cash Flow ($) Discounted Factor at Present Value Discounted Factor at Present Value
10% 20%
0 (142,700) 1.000 (142,700) 1.000 (142,700)
1 51,000 0.909 46,359 0.833 42,483
2 62,000 0.826 51,212 0.694 43,028
3 73,000 0.751 54,823 0.579 42,267
Net Present Value 9,694 (14,922)
Illustration 19
An investment has the following expected cash flows over its economic life of three years:
Year $
0 (142,700)
1 51,000
2 62,000
3 73,000
Calculate the net present value (NPV) of the project at discount rates of 0%, 10% and 20%.
Based on the above illustration, determine the Internal Rate of Return (IRR).
A
IRR = a% + [ x (b – a)]%
A–B
a = Interest rate #1
b = Interest rate #2
A = NPV at interest rate a
B = NPV at interest rate b
QUESTIONS:
1. B Limited wishes to set up a sinking fund that will be sufficient to pay for a new asset in six
years’ time. The new asset will cost $200,000 in six years’ time. The cost of capital is 12%.
How much should the company set aside on an annual basis if they start making payments
into the fund now and finish immediately before the asset is acquired?
A $19,824 C $24,645
B $21,081 D $31,482
Total payment: 7 instalments
AF: 4.111 + 1 = 5.111
PV of Annuity = 200,000 ÷ 1.126 = 101,326
Annuity = 101,326 ÷ 5.111 = 19,825
2. Alice is planning on paying $300 into a fund on a monthly basis starting three months from
now, for twelve months. The interest earned will be at a rate of 3% per month.
What is the present value of these payments?
A $2,816 C $2,541
B $2,733 D $2,986
$300 paid at the beginning of the month
AF for 14 months: 11.296
3. Angelina wishes to take out a loan for $2,000. The interest rate on this loan would be 10% per
annum and Augustine wishes to make equal monthly repayments, comprising interest and
principal, over three years starting one month after the loan is taken out.
What would be the monthly repayment on the loan (to the nearest $)?
A $56 C $66
B $64 D $67
Interest per annum: 10%
Interest per month: 0.8333%
AF for 36 months: 31.0093
Annuity: 2000 ÷ 31.0093
4. Mr Menon has recently won a competition where he has the choice between receiving
$5,000 now or an annual amount forever starting now (i.e. a level perpetuity starting
immediately). The interest rate is 8% per annum.
What would be the value of the annual perpetuity to the nearest $?
A $370 C $400
B $500 D $620
$5,000 x 0.08 = $400
5. James wants to invest his pocket money. He receives $5 a month which he puts into a
savings account earning compound interest at 0·5% per month.
If James saves his money, how much will be in the account in five years’ time (60 months) (to
nearest $)?
A $303 C $349
B $338 D $354
AF for 60 months: 51.7256
PV of Annuity: 5 x 51.7256 = 259
Annual interest: (1+ 0.005)12 -1 = 6.1678%
FV of Annuity: 259 x (1+0.061678)5
=349
Note:
Normally in exam Q: AF is given. Students no need to calculate
7. Dalby is currently considering an investment that gives a positive net present value of $3,664
at 15%. At a discount rate of 20% it has a negative net present value of $21,451.
What is the internal rate of return of this investment?
A 15.7% C 19.3%
B 16.0% D 19.9%
IRR = 15% + {[3664 ÷ (3664+21451)] x 5} %
= 15.7%
$000
0 (20,000) 1 (20,000)
1-4 3,000 3.312 9,936
(i) Calculate the payback period for the project. 2.5years ($1,000 ÷ $400)
(ii) Calculate the net present value (NPV) of the project using a discount rate of 12% per
annum. $442k
Time $ AF@12% PV@12% DF@20% PV@20%
0 (1,000) 1 (1,000) 1 (1,000)
1-5 400 3.605 1,442 2.991 1,196.4
NPV 442 (196.4)
11. A company has to choose between two projects, Project A and Project B. Cash inflow
projections are as follows:
Year Project A ($000) Project B ($000)
1 100 200
2 200 200
3 300 200
4 400 200
5 500 200
The projects require an initial investment of:
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Project A $900,000
Project B $640,000
a) Calculate for each project:
(i) The net present value;
Time $ DF@15% PV@15% DF@20% PV@20%
0 (900) 1 (900) 1 (900)
1 100 0.870 87 0.833 83.3
2 200 0.756 151.20 0.694 138.8
3 300 0.658 197.4 0.579 173.7
4 400 0.572 228.8 0.482 192.0
5 500 0.497 248.5 0.402 201
NPV 12.9 (111.2)
12. Barcombe has been looking at a potential project which has the following cash inflows:
End of year $’000
1 15
2 17
3 22
4 2
To acquire these inflows Barcombe would have to invest $36,000 in fixed assets now. The assets
would be expected to be sold at the end of the project for $2,000.
a) Calculate the net present value of the project using 10% and 20% as the discount factors.
Time $ DF@10% PV@10% DF@20% PV@20%
0 (36,000) 1 (36,000) 1 (36,000)
1 15,000 0.909 13,635 0.833 12,495
2 17,000 0.826 14,042 0.694 11,798
3 22,000 0.751 16,522 0.579 12,738
4 2,000 0.683 1,366 0.482 964
NPV 9,565 1,995
b) Using your results from part (a), calculate the internal rate of return for this investment to one
decimal place.
IRR = 10% + {[9,565 ÷ (9,565-1,995)] x 10}%
= 22.64%
13. A capital investment project requires a cash outflow of $81,000 (time 0) at the start of the
project. Annual cash inflows are forecast to be constant for four years (Years 1 to 4).
The net present value (NPV) of the project at a discount rate of 12% per annum is $8,683
(positive). The internal rate of return of the project is 17%. Annuity factors (Years 1 to 4) at 12%
and 17% are 3.037 and 2.743 respectively.
What is the forecast annual cash inflow?
A $23,810
B $26,670
C $29,530 (81,000 + 8,683) ÷ 3.037
D $32,695
15. A company has decided to lease a machine. Six annual payments of $8,000 will be made
with the first payment on receipt of the machine. Below is an extract from an annuity table:
Year Annuity factor
10%
1 0.909
2 1.736
3 2.487
4 3.170
5 3.791 + 1 (Time 0)
6 4.355
What is the present value of the lease payments at an interest rate of 10%?
A $30,328
B $34,840
C $38,328 (8,000 × 4.791)
D $48,000
Starts the payment on Time 0 (payment 1), Time 1 (payment 2), Time 2 (payment 3)……
16. A company has incurred sunk cost development costs of $25,000 to date on a proposed new
product. Further costs of $18,000 incremental cost would be required to complete the
development of the product.
In deciding whether to continue with the new product development which of the following is
correct regarding development costs?
Sunk cost Incremental cost
A $0 $43,000
B $18,000 $25,000
C $25,000 $18,000
D $43,000 $0
17. A company is proposing to launch a new product. Incremental net cash inflows of $36,000
per annum for five years are expected, starting at Time 1.
An existing machine, with a net book value of $85,000 irrelevant; sunk cost, would be used to
manufacture the new product. The machine could otherwise be sold now, Time 0, for
$60,000 if sold now, can get $$$. The machine, if used for the manufacture of the new product,
would be depreciated on a straight-line basis over five years, starting at Time 1.
What are the relevant amounts that should be used, at Time 0 and Time 1, in the discounted
cash flow appraisal of the project?
Time 0 Time 1
A $0 $19,000
B $0 $24,000
C ($60,000) $36,000
D ($85,000) $36,000
19. A machine has an investment cost of $60,000 at time 0. The present values (at time 0) of the
expected net cash inflows from the machine over its useful life are:
Discount rate Present value of cash inflows
10% $64,600
15% $58,200
20% $52,100
What is the internal rate of return (IRR) NPV=0 of the machine investment?
A Below 10%
B Between 10% and 15%
C Between 15% and 20%
D Over 20%
20. An investment project has a positive net present value (NPV) of $7,222 when its cash flows
are discounted at the cost of capital of 10% per annum. Net cash inflows from the project
are expected to be $18,000 per annum for five years. The cumulative discount (annuity)
factor for five years at 10% is 3.791.
What is the investment at the start of the project?
A $61,016 [($18,000 x 3.791) – $7,222] = $61,016
B $68,238
C $75,460
D $82,778
21. The following statements relate to an investment project that has been discounted at rates
of 10% and 20%:
1. The discounted payback period at 10% will be longer than the discounted payback
period at 20%.
2. The discounted payback period at 20% will be longer than the discounted payback
period at 10%.
3. The non-discounted payback period will be longer than the discounted payback period.
4. The non-discounted payback period will be shorter than the discounted payback period.
Which of the statements are true?
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A 1 and 3
B 1 and 4
C 2 and 3
D 2 and 4
22. A company is considering the use of Material X in a special order. A sufficient quantity of the
material, which is used regularly only replacement cost is relevant by the company in its normal
business, is available from stock.
What is the relevant cost per kg of Material X in the evaluation of the special order?
A cost of the last purchase
B nil
C replacement cost
D saleable value
23. A capital investment project has an initial investment followed by constant annual returns.
How is the payback period calculated?
A initial investment ÷ annual profit
B initial investment ÷ annual net cash inflow
C (initial investment – residual value) ÷ annual profit
D (initial investment – residual value) ÷ annual net cash inflow
24. What is the effective annual rate of interest of 2.1% compounded every three months?
A 6.43%
B 8.40%
C 8.67% [(1·021)4 – 1] × 100 = 8·67%
D 10.87%
26. What term is used to represent the benefit sacrificed when one course of action is chosen in
preference to an alternative?
A Avoidable cost
B Direct cost
C Incremental cost
D Opportunity cost
27. Which of the following accurately defines the internal rate of return (IRR)?
A The average annual profit from an investment expressed as a percentage of the
investment sum
B The discount rate (%) at which the net present value of the cash flows from an
investment is zero
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C The net present value of the cash flows from an investment discounted at the required
rate of return
D The rate (%) at which discounted net profits from an investment is zero
28. What is the effective annual rate of interest of 4.3% compounded every six months?
A 8.60%
B 8.78% [(1.043)² – 1]
C 9.25%
D 10.88%
29. Net cash flows, estimated for a capital investment project, have been discounted at four
discount rates with the following results:
Discount rate
5% 10% 15% 20%
Net present value ($000) 92.9 39.1 (4.8) (40.9)
What is the best estimate of the IRR using only the above data as appropriate?
A 13.6%
B 14.5% {10% + [(15 – 10%) x (39.1 ÷ 43.9)]}
C 15.4%
D 15.7%
30. A project, investing in new machinery, has an estimated five year life. The cost of capital is
10% per annum.