Management Accounting: Costing - Osborne · PDF fileVariable materials 270,000 Variable labour ... 14 management accounting: costing tutor zone ... Using absorption costing for the

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ManagementAccounting:CostingAnswers to chapter activities

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1.1Explanation TermA cost which remains unchanged over a rangeof output levelsA cost that cannot be identified with each unit ofoutput A unit of output to which costs can be chargedA cost which is neither a material cost nor alabour costA cost which varies directly with outputThe total of all direct costs

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1.2 Fixed cost: (b), (c) and (f)Variable cost: (a), (d), (e) and (g)

1.3 (a), (c), (d), (f) and (g) are true.

Fixed cost

Indirect cost

Cost unit

Expense

Variable costPrime cost

1.5 Production (‘factory’) costs Non-production (‘warehouse & office’) costs Direct costs Indirect costs Administration Selling and Finance (overheads) indirect costs distribution indirect costs (overheads) indirect costs (overheads) (overheads)

Materials (c) (j) (l) (m) Labour (b) (e) (k) (i) Expenses (f) (a) (h) (d) (g)

An introduction to cost accounting1

1.4 (a), (e) and (f) Variable; (b) Semi-variable; (c), (d) and (g) Fixed

a n s w e r s t o c h a p t e r a c t i v i t i e s 3

1.6 (c) The inventory valuation has been changed from AVCO to FIFO to make the profit look better

1.7 (a) Report To: Finance Director of Traditional Cabinets LimitedFrom: Accounts AssistantDear Rob, Please find below the summary of the costs, profit and return on investment for eachdepartment.

Kitchen Department Bathroom Department £000 £000Total cost 207 130Profit 298 70Return on investment 73.58% 155.56%

The Bathroom Department incurs the lowest amount of costs, in terms of labour,materials and overheads and also is the least profitable, producing profits of £70,000 inthe year. However, when you consider the money invested in the Bathroom Department,its return on investment is very high at 155.56%, outperforming Kitchens. The Kitchen Department costs the most to run but generates the most profit of the twodepartments – £298,000. However, it requires more equipment, so the return oninvestment is lower than Bathrooms at 73.58%.

(b) (c) The department’s revenue, fixed and variable costs


2.1 The method used is last in first out (LIFO).

2.2 (a) The Economic Order Quantity (EOQ) for RX3 is 1,500 kg Workings: √ [(2 x 225,000 x £2.50) / £0.50]

(b) and (c) Receipts Issues Balance

Date Qty Cost per kg Total cost Qty Cost per kg Total cost Qty Total cost (kg) £ £ (kg) £ £ (kg) £Balance20 Nov 150 24021 Nov 1,500 1.616 2,424 1,650 2,66422 Nov 1,000 1.615 1,615 650 1,04925 Nov 1,500 1.620 2,430 2,150 3,47930 Nov 1,800 1.618 2,912 350 567

2.3

Receipts Issues BalanceDate Qty Cost per kg Total cost Qty Cost per kg Total cost Qty Total cost (kg) £ £ (kg) £ £ (kg) £

Balance 1 Sept 480 2,400

2 Sept 500 5.120 2,560 980 4,960

4 Sept 1,500 5.100 7,650 2,480 12,610

5 Sept 400 5.000 2,000 2,080 10,610

7 Sept 1,000 5.102 5,102 1,080 5,508

Workings:

7 September: 80 kg at £5.000 + 500 kg at £5.120 + 420 kg at £5.100 total 1,000 kg = £5,102

Materials costs2


2.4 kgRe-order level (1) 650Maximum inventory level (2) 2,150Average inventory level (3) 1,150

Workings:(1) 150 + (50 x 10 days) = 650(2) 150 + 2,000 = 2,150 (on arrival of order)(3) [(max 2,150 – min 150) / 2] + 150 = 1,150

2.5 Cost £FIFO issue 27,875AVCO issue 28,167FIFO balance 7,875AVCO balance 7,583

2.6 The LIFO method of costing issues will not always mean that the inventory in the warehouse is notused date order.

2.7 (a) Cost accounting code Amount £Debit 5800 304Credit 2500 304

(b) Cost accounting code Amount £Debit 5600 330.00Credit 5800 330.00


3.1 (a) £20,500 Workings: (1,900 hours x £10/hour + 300 hours x £5/hour)(b) £19,000 Workings: (1,900 hours x £10/hour)(c)

Debit £ Credit £Work in progress 19,000 Overheads 1,500 Wages control account 20,500

(d) £23.750 Workings: (£19,000 / 800)

3.2Employee Number Payment methods (a) (b) (c)

1 £508.00 £446.25 £555.50

2 £444.00 £420.00 £526.00

3 £460.00 £315.00 £380.00

4 £492.00 £430.50 £535.00

Labour costs3


3.3

Employee: P. Boyd Profit Centre: Plastic extrusionEmployee number: K089 Basic pay per hour: £15.00 Hours spent Hours worked Notes Basic rate Overtime Total pay on production on indirect work £ premium £ £Monday 7 105.00 0 105.00 Tuesday 3 4 9am – 1pm 105.00 0 105.00 setting up equipmentWednesday 8 120.00 7.50 127.50 Thursday 6 2 10am – 12am 120.00 7.50 127.50 cleaning of machinery Friday 6 1 3 – 4pm weekly 105.00 0 105.00 meeting Saturday 4 60.00 30.00 90.00

Sunday 2 30.00 30.00 60.00

Total 36 7 645.00 75.00 720.00

3.4 (a)

(b) The average labour cost per hour for May is £20.05

(c) The total pay per employee, including bonus, for May will be £2,205 and the bonus payablewill be £450 per employee.

Labour cost Hours £Basic pay 450 6,750Overtime rate 1 60 1,125 Overtime rate 2 40 900Total cost before team bonus 550 8,775Bonus payment 2,250Total cost including team bonus 11,025


3.5 (a) Cost accounting code AmountDebit 8500 1174.20Credit 6500 1174.20

(b) Cost accounting code AmountDebit 9800 90.00Credit 4100 90.00

Overheads and expenses44.1 (a)

Overhead Basis Total Manufacturing Finishing Stores £ £ £ £

Rent Area 4,000 2,000 1,000 1,000

Indirect labour Allocation 7,400 2,500 1,500 3,400

Depreciation NBV NCA 1,200 600 200 400

Other property o/h Area 2,400 1,200 600 600

Sub total 15,000 6,300 3,300 5,400Storesreapportioned 4,050 1,350 (5,400)

Totals 15,000 10,350 4,650 0

(b) £6.47 £10,350 / 1,600 hours = £6.47 per direct labour hour.(c) £1,293 over absorbed. (£6.47 x 1,900) – £11,000 = £1,293


4.2 Carrying Number of Area of Power No of quality value of plant employees cost centres consumption control of plant inspectionsStaff canteen costs Buildings insurance Power for plant Heating and lighting Staff uniform costs Maintenance of plant Rent and ratesQuality control costs

4

4

4

4

4

4

4

4

4.3

Basis Assembly Finishing Maint’ce Stores Admin Totals £ £ £ £ £ £

Depreciation of plant Carryingand equipment value 153,984 81,466 0 0 0 235,450

Power for production machinery KwH 304,912 96,288 0 0 0 401,200

Rent and rates Sq mt 39,400 28,565 15,760 9,456 5,319 98,500

Light and heat Sq mt 17,424 12,632 6,970 4,182 2,352 43,560

Indirect labour Allocate 0 0 67,400 55,300 151,650 274,350

Totals 515,720 218,951 90,130 68,938 159,321 1,053,060

Reapportion maintenance 76,611 13,519 (90,130)

Reapportion stores 44,810 24,128 (68,938)

Reapportion general admin 95,593 63,728 (159,321)

Total overheads to production centres 732,734 320,326 1,053,060

1 0 m a n a g e m e n t a c c o u n t i n g : c o s t i n g t u t o r z o n e

4.4 Statement (g) (Budgeted overhead costs divided by budgeted direct labour hours) shows thecorrect calculation of the overhead absorption rate when based on direct labour hours.

4.6 Under absorbed over heads need to be debited to the Profit and Loss Account. The company’s profit will be reduced by this.

4.5 (a) Shampoo manufacture £ Boxing and packaging £

Budgeted overhead absorption rate 14.00 per hour 30 per hour

(b) In Quarter 1 overheads for the Shampoo Manufacturing Department were UNDER-ABSORBED by£9,510.

(c) Overheads Overheads Difference Under/over incurred absorbed absorbed absorption £ £ £ Boxing and packaging department 25,600 23,040 2,560 under-absorption

a n s w e r s t o c h a p t e r a c t i v i t i e s 1 1

5.3 (a) Weight (kg) Value per kg £ Total Value £Normal loss 12,000 1.30 15,600Abnormal gain 1,000 5.45 5,450Finished product 109,000 5.45 594,050

Value of finished goods and abnormal gain is based on expected figures: (£604,200 – £15,600) / 108,000 kg = £5.45 per kg(b) If the amount received from the actual 11,000 kg scrap is £1.30 per kg, the balance in the

abnormal gain account will be a credit of £4,150. Working: (Gain £5,450 – (1,000 kg x £1.30)) = £4,150

5.2 Process account Normal loss Abnormal loss account or gain account Debit Credit Debit Credit Debit CreditNormal loss (with scrap value) Abnormal gain Abnormal loss

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4

4

4

4

4

4

4 4

4 4

4 4

Methods of costing5

5.1 Job Batch Service Process costing costing costing costing(a) Manufacturing paper clips(b) Manufacturing fire engines to individual

specifications(c) Running a nursing home(d) Manufacturing cleaning chemicals(e) Rewiring commercial buildings(f) Printing text books(g) Operating an oil refinery


5.4Description kg Unit Total Description kg Unit Total cost cost cost cost £ £ £ £

Material AH1 700 1.30 910 Normal loss 75 1.00 75

Material AH3 500 1.60 800 Output 1,425 11.00 15,675

Material AH5 300 0.40 120

Labour 5,760

Overheads 8,160

1,500 15,750 1,500 15,750

6.1 (a), (d) and (f) Marginal costing; (b), (c) and (e) Absorption costing

6.2Statement of profit or loss – absorption costing

£ £Sales 750,000Direct materials 240,000 Direct labour 300,000 Fixed overheads 120,000 Total cost of production 660,000 Less closing inventory* 165,000 Cost of Sales 495,000Profit 255,000

*(£660,000 / 20,000 units) x 5,000 units

Marginal, absorption and activitybased costing6


6.3Statement of profit or loss – absorption costing

£ £Sales 1,000,000Opening inventory 210,000 Direct materials 270,000 Direct labour 180,000 Fixed overheads 180,000 Cost of sales 840,000Profit 160,000

Statement of profit or loss – marginal costing £ £

Sales 1,000,000Opening inventory 150,000 Variable materials 270,000 Variable labour 180,000 Variable cost of sales 600,000Fixed costs 180,000Profit 220,000

Statement of profit or loss – marginal costing £ £Sales 750,000Variable materials 240,000 Variable labour 300,000 Variable cost of production 540,000 Less closing inventory* 135,000 Variable cost of sales 405,000Fixed costs 120,000Profit 225,000

*(£540,000/20,000 units) x 5000 units


6.6 £ £

Prime (Direct) Cost 146,000 Opening inventory of raw materials 20,000

Opening inventory of raw materials 20,000 Purchases of raw materials 88,000

Closing inventory of work in progress 38,000 Closing inventory of raw materials 22,000

Direct labour 60,000 Raw materials used in manufacture 86,000

Opening inventory of work in progress 20,000 Direct labour 60,000

Factory cost 188,000 Prime (Direct) Cost 146,000

Closing inventory of raw materials 22,000 Manufacturing overheads 42,000

Manufacturing overheads 42,000 Factory cost 188,000

Raw materials used in manufacture 86,000 Opening inventory of wk in progress 20,000

Purchases of raw materials 88,000 Closing inventory of wk in progress 38,000

Factory cost of goods manufactured 170,000 Factory cost of goods manufactured 170,000

6.4 (a) £2.90 (£62,500 + £10,000) / 25,000(b) £3.70 (£99,500 – £7,000) / 25,000(c) £3.20 (£62,500 + £10,000 + £7,500) / 25000(d) £80,000 (£62,500 + £10,000 + £7,500)(e) £92,500 (£99,500 – £7,000)(f) (a) Production overheads

6.5 (b) Using absorption costing for the closing inventory valuation


Aspects of budgeting7

7.3

Batches produced and sold 3,200 3,500 4,000

£ £ £Sales revenue 64,000 70,000 80,000Variable costs: • Direct materials 12,800 14,000 16,000• Direct labour 16,000 17,500 20,000• Overheads 9,600 10,500 12,000Semi-variable costs: 17,800 18,250 19,000• Variable element 4,800 5,250 6,000• Fixed element 13,000 13,000 13,000Total cost 56,200 60,250 67,000Total profit 7,800 9,750 13,000Profit per batch (to three decimal places) 2.438 2.786 3.250

7.1 (a) Cost per month £ Output per month (units)Data provided 65,000 11,500 95,000 19,000

Difference 30,000 7,500

Variable cost per unit 4.00 Fixed cost per month 19,000

(b) £Variable costs 51,200Fixed costs 19,000Total costs 70,200

7.2 (a), (c), (d), (e) and (f) are true.

7.4 Budget Budget £ Actual £ Variance A FSales 155,000 149,500 £5,500 4 Direct materials 34,200 36,200 £2,000 4 Direct labour 41,200 42,100 £900 4 Production overheads 25,600 25,500 £100 4Administration overheads 10,200 10,450 £250 4 Selling and distribution overheads 18,800 20,100 £1,300 4

7.5 Original budget Budget flexed at Budget flexed at 75% activity level 120% activity levelNumber of units 120,000 90,000 144,000 £ £ £Sales 4,920,000 3,690,000 5,904,000Direct materials 1,320,000 990,000 1,584,000Direct labour 1,800,000 1,350,000 2,160,000Overheads 1,300,000 1,300,000 1,300,000 Profit from operations 500,000 50,000 860,000

7.6 (b), (d), (e) and (f) are true.

7.7 (a)

Flexed budget Actual Variance (F), (A) or 0 Volume sold 194,000 194,000 £ £ £Sales revenue 1,164,000 1,160,000 4,000 ALess costs: Direct materials 291,000 290,000 1,000 FDirect labour 465,600 450,000 15,600 FOverheads 210,000 218,000 8,000 AProfit from operations 197,400 202,000 4,600 F

(b) (c) Direct labour



8.2 (a) 1,500(b) 20%; break-even £750(c)

Sales (bottles) 2,000 per week 3,000 per week £ £Sales income 1,000 1,500Variable costs 800 1,200Contribution 200 300Fixed costs 150 150Profit 50 150

(d) 4,000

8.1Calculation method Performance indicatorFixed costs divided by contribution per unit (e)

Selling price per unit minus variable costs per unit (a)

Sales volume minus break-even sales volume (g)

(Fixed costs plus target profit) divided by CS ratio (b)

(Sales minus variable costs) divided by sales (c)

8.3 (a) 40%; break-even £10,000(b) 60%(c)

£ £Sales income 20,000 30,000Variable costs 12,000 18,000Contribution 8,000 12,000Fixed costs 4,000 4,000Profit 4,000 8,000

(d) £35,000

Short-term decisions8


8.4 (a)

Tables £ Chairs £ Total £

Sales income 40,000 32,000 72,000

less variable costs 20,000 20,000 40,000

Contribution 20,000 12,000 32,000

less fixed costs 25,000

Profit 7,000

(b) The contribution per table: £100 The break-even point in numbers of tables per month: 250 Tables needed to be made and sold to achieve the current profit level: 320 per month

(c) Table ChairContribution per unit £100 £30Labour hours per unit 2 1Contribution per labour hour £50 £30Ranking 1 2

(d) Tables: 200 Chairs: 300


9.2 (a) Project A Year 0 Year 1 Year 2 Year 3 Year 4 £000 £000 £000 £000 £000

Net cashflows –90 40 60 54 0

PV factors 1.000 0.909 0.826 0.751 0.683

Present values (to nearest £000) –90 36 50 41 0

Net present value (to nearest £000) 37

(b) Project B Year 0 Year 1 Year 2 Year 3 Year 4 £000 £000 £000 £000 £000

Net cashflows –90 30 30 30 30

PV factors 1.000 0.909 0.826 0.751 0.683

Present values (to nearest £000) –90 27 25 23 20

Net present value (to nearest £000) 5

9.1

Description Name of key term

The length of time that it would take to get back the initialinvestment in a project

The difference between the present value of the total cashinflows and total cash outflows of a project

The system that converts cash flows that occur at variouspoints in time to their present value by taking account of thetime value of money

The rate which when used to discount the cash flows in aproject results in a net present value of zero

The result of comparing the present value of the total cashinflows and total cash outflows of a project when theoutflows are greater than the inflows

(c) Payback period

(e) Net present value

(d) Discounted cash flow

(b) Internal rate of return

(a) Net present cost

Long-term decisions


9.3 (a)

Year Detail Cash flow Discount factor Present value £ £

0 Purchase and installation –1,750 1.000 –1,750

1 Savings 500 0.909 455

2 500 0.826 413

3 500 0.751 376

4 500 0.683 342

5 500 0.621 311

Net present value 147

(b) The payback period for the project in years and months is: 3 years, 6 months.

(c) Yes

(c) The project which is better in terms of net present value is project A(d) Project A: 1 year, 10 months

Project B: 3 years, 0 months(e) The project which is better in terms of payback period is project A

9.4 (a)

Year 0 Year 1 Year 2 Year 3 £000 £000 £000 £000

Capital expenditure –1,170 Sales income 650 760 790Operating costs 110 130 140Net cash flows –1,170 540 630 650PV factors 1.0000 0.8696 0.7561 0.6575Discounted cash flows –1,170 470 476 427Net present value 203

The net present value is positive.(b) The payback period is 2 Years and 0 Months.


9.5 (a) The discount factor that results in a net present value of zero

9.6 Appraisal method Recommendation

Payback period Reject as more than 2 years

NPV Accept as positive

IRR Accept as higher than the cost of capital

Overall Accept as per most important investment criteria

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Management Accounting: Costing - Osborne · PDF fileVariable materials 270,000 Variable labour ... 14 management accounting: costing tutor zone ... Using absorption costing for the