ACCA F2 Management Accounting - 2010 - Study text

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Practice questions

4 Maintenance and repair costs

Entity Z is trying to obtain a cost estimate for the costs of repairs. The following

monthly repair costs have been recorded for the past six months.

Month

Number of

machines repaired

Cost of repairs

1 38 31,000

2 41 32,700

3 25 26,500

4 21 23,600

5 36 29,900

6 32 28,900

Required

Use high/low analysis to estimate the fixed costs of repairs each month and the

variable cost per machine repaired.

Estimate the expected costs of repairs in a month when 30 machines are repaired.

5 Regression

Total production costs each week in a production department have been measured

for the past five weeks, as follows.

Week Units produced Total cost

$000

1 5 20

2 9 27

3 4 17

4 5 19

5 6 23

Required

(a) Use linear regression analysis to obtain an estimate of fixed costs per week

and the variable cost of production per unit.

(b) Use your results to estimate total costs in a week when 8 units are produced.

have obtained.

(d) Estimate a value for fixed costs and variable costs from the same data, using

the high/low analysis, and use the values that you obtain to estimate total

costs in a week when 8 units are produced.

6 Stock items 6786 and 6787

(a) A company uses 15,000 units of stock item 6786 each year. The item has a

purchase cost of $4 per unit. The cost of placing an order for re-supply is $220.

The annual holding cost of one unit of the item is 10% of its purchase cost.

Required

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(i) What is the economic order quantity for item 6786, to the nearest unit?

(ii) What would be the effect of an increase in the annual holding cost per

unit on (1) the EOQ and (2) total annual ordering costs?

(b) Data relating to stores item 6787 are as follows.

Daily use: 300 units

Lead time for re-supply: 5 – 20 days

Reorder quantity: 10,000 units

Required

What should be the reorder level for this stock item, to avoid the possibility of

inventory-outs?

7 Inventory control

Entity G uses 105 units of an item of inventory every week. These cost $150 per unit.

They are stored in special storage units and the variable costs of holding the item is

$4 per unit each year plus 2% of the inventory’s cost.

Required

(a) If placing an order for this item of material costs $390 for each order, what is

the optimum order quantity to minimise annual costs? Assume that there are

52 weeks in each year.

(b) Suppose that the supplier offers a discount of 1% on the purchase price for

order sizes of 2,000 units or more. What will be the order size to minimise total

annual costs?

8 Economic batch quantity

A machine has the capacity to operate for 40 weeks each year during a 50-week

year. It is used to manufacture several items, including component 3456.

Component 3456 is produced in batches.

The machine is able to produce 8,000 units of item 3456 per hour. The cost of set-up

for each batch is $6,000. Demand for the component occurs at an even rate

throughout the year, and totals 2.5 million units per year. The cost of holding one

unit of component 3456 in inventory is $1.50 per unit per year.

Required

(a) Calculate the economic batch production quantity for component 3456 to the

nearest 10,000 units.

(b) Calculate the total costs per year of setting up the batches and inventory

holding costs for this component, assuming the item is produced in batches of

the size calculated in your answer to part (a).

Practice questions

9 Piece work

A production company pays the workers in a production department on a piece

work basis. The workers produce a standard item, and the standard time allowed

for the purpose of calculating pay is five minutes per unit. The company also

guarantees these workers 75% of a time-based rate of pay, based on a rate of $24 per

hour for a 7.5 hour day, and a five-day week. Piece work is paid at the rate of $20

per standard hour.

Required

What will be the weekly pay for a worker who produces:

(a) 444 units per week

(b) 400 units per week?

10 Labour cost

Two grades of direct labour workers are employed to produce units of Product

1234. There are 40 Grade 1 employees and 20 Grade 2 employees. All employees

work a basic week of 40 hours. Grade 1 employees are paid $10 per hour and Grade

2 employees are paid $15 per hour. If employees work any overtime, they are paid

at time-and-one-third (a premium of one third over the basic rate). There are also

five ‘support workers’, such as maintenance engineers, who are paid $12 per hour

for a basic 40-hour week.

During Week 23, the Grade 1 employees and support workers each worked 40

hours, and the Grade 2 employees worked 46 hours. Due to difficulties with some

equipment, 250 hours of Grade 1 labour and 100 hours of Grade 2 labour were

recorded as idle time in the week.

During Week 23, 4,000 units of Product 1234 were manufactured.

Required

(a) Calculate the direct labour costs and the indirect labour costs in Week 23.

(b) Calculate the direct labour cost per unit of Product 1234 in Week 23.

11 Overhead cost per unit

A company makes two products, Product X and Product Y. Each product is processed

through two cost centres, CC1 and CC2. The following budgeted data is available.

CC1 CC2

Allocated and apportioned overheads $126,000 $180,000

(All overheads are fixed costs.)

Direct labour hours per unit

Product X 1.5 2.0

Product Y 1.2 2.6

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The budgeted production is 12,000 units of Product X and 10,000 units of Product Y.

Fixed overheads are absorbed into costs on a direct labour hour basis.

Required

Calculate the budgeted total fixed overhead cost per unit for Product X and for

Product Y.

12 Apportionment

A production centre has three production departments, A, B and C.

Budgeted production overhead costs for the next period are as follows:

Factory rent 60,000

Equipment depreciation 80,000

Insurance 20,000

Heating and lighting 18,000

Indirect materials:

Department A 7,000

Department B 6,600

Department C 9,400

Indirect labour:

Department A 40,000

Department B 27,000

Department C 20,000

Insurance costs relate mainly to health and safety insurance, and will be

apportioned on the basis of the number of employees in each department. Heating

and lighting costs will be apportioned on the basis of volume.

Other relevant information is as follows:

Total

Department

Direct labour hours 18,000

8,000

6,000 4,000

Number of employees 50

16 14

Floor area (square metres) 1,200

300

400 500

Cost of equipment ($000s) 1,000

200

600 200

Volume (cubic metres) 18,000

8,000

6,000 4,000

Required

(a) Calculate the overhead costs for each production department.

(b) Calculate an overhead absorption rate for the period for each department,

assuming that a separate direct labour hour absorption rate is used for each

department.

factory-wide direct labour hour absorption rate is used.

Practice questions

13 Service departments

In a factory with four production departments and two service departments, the

operating costs for the month of October were as shown below.

Production Department 1 700,000

Production Department 2 300,000

Production Department 3 400,000

Service departments

Canteen 78,000

Boiler house 100,000

1,578,000

The costs of running the canteen are apportioned to each department on the basis of

the estimated use of the canteen by employees in each department.

The costs of the boiler house are apportioned on the basis of the estimated

consumption of power by each department.

The service departments’ costs are therefore apportioned as follows:

Canteen Boiler

house

% %

Production Department 1 40 30

Production Department 2 20 30

Production Department 3 30 20

Service departments

Canteen - 20

Boiler house 10 -

Required

Prepare a statement showing the allocation of costs to the production departments

using:

(a) the repeated distribution method

(b) the algebraic method or simultaneous equations method.

14 Volume and expenditure variances

A production manager is studying the cost report for the six-month period that has

just ended. The production department incurred overhead costs of $680,000 and had

under-absorbed overheads of $46,400. The actual direct labour hours worked in the

department were 48,000 hours, which was 2,000 hours less than budgeted.

Required

(a) Calculate the budgeted absorption rate per direct labour hour.

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(b) Calculate the budgeted overhead expenditure.

15 Plack Company

Plack Company is a manufacturing company that makes and sells a single product.

The following information relates to the company’s manufacturing operations in the

next financial year.

Opening and closing stock: Nil

Production: 18,000 units

Sales: 15,000 units

Fixed production overheads: $117,000

Fixed sales overheads: $72,000

Using absorption costing, the company has calculated that the budgeted profit for

the year will be $43,000.

Required

What would be the budgeted profit if marginal costing is used, instead of

absorption costing?

16 Differences

Entity T manufactures a single product, and uses absorption costing. The following

data relates to the performance of the entity during October.

Profit $37,000

Over-absorbed overhead $24,000

Sales (48,000 units) $720,000

Non-production overheads (all fixed costs) $275,000

Opening inventory $144,000

Closing inventory $162,000

Units of inventory are valued at $9 each, consisting of a variable cost (all direct

costs) of $3 and a fixed overhead cost of $6. All overhead costs are fixed costs.

Required

Calculate:

(a) the actual production overhead cost for October

(b) the profit that would have been reported in October if Entity T had used

marginal costing.

17 Marginal and absorption

Entity RH makes and sells one product. Currently, it uses absorption costing to

measure profits and inventory values. The budgeted production cost per unit is as

follows:

Practice questions

Direct labour 3 hours at $6 per hour 18

Direct materials 4 kilograms at $7 per kilo 28

Production overhead (Fixed cost) 20

Normal output volume is 16,000 units per year and this volume is used to establish

the fixed overhead absorption rate for each year.

Costs relating to sales, distribution and administration are:

 Variable 20% of sales value

 Fixed $180,000 per year.

There were no units of finished goods inventory at 1 October Year 5.

The fixed overhead expenditure is spread evenly throughout the year.

The selling price per unit is $140.

For the two six-monthly periods detailed below, the number of units to be produced

and sold are budgeted as follows:

Six months ending

31 March Year 6

Six months ending

30 September Year 6

Production 8,500 units 7,000 units

Sales 7,000 units 8,000 units

The entity is considering whether to abandon absorption costing and use marginal

costing instead for profit reporting and inventory valuation.

Required

(a) Calculate the budgeted fixed production overhead costs each year.

(b) Prepare statements for management showing sales, costs and profits for each

of the six-monthly periods, using:

(i) marginal costing

(ii) absorption costing

profit using marginal costing with the profit using absorption costing.

18 Job 6789

A company operates a job costing system. Job number 6789 will require $345 of

direct materials and $210 of direct labour, which is paid $14 per hour. Production

overheads are absorbed at the rate of $30 per direct labour hour and non-production

overheads are absorbed at the rate of 40% of prime cost.

Required

What is the total expected cost of the job?

Paper F2: Management accounting

19 Process costing: the basic rules

The following examples take you through the basic rules for process costing.

Required

For each of the following examples, calculate:

(a) the cost of completed output from the process, and

(b) if there is any, the cost of any abnormal loss or the value of any abnormal gain

Example 1

1,500 litres of a liquid were input to a process at a cost of $7,200. Normal loss is 20%

of the input quantity. Actual loss was equal to the normal loss.

Example 2

1,500 litres of liquid were input to a process at a cost of $7,200. A normal loss of 20%

of the input is expected. The actual output for the period was only 1,100 litres.

Example 3

1,500 litres of liquid were input to a process at a cost of $7,200. A normal loss of 20%

of the input is expected. Loss is sold as scrap, for a net sales price of $0.40 per litre.

The actual output from the process was 1,200 litres.

Example 4

1,500 litres of liquid were input to a process at a cost of $7,200. The output from the

process was 1,100 litres. Normal loss is 20% of the input quantity. Any lost units

have a scrap value of $0.40 per litre.

Example 5

1,500 litres of liquid were input to a process at a cost of $7,200. Normal loss is 20% of

the input quantity but the actual output for the period was 1,250 litres. Loss has no

scrap value.

Example 6

1,500 litres of liquid were input to a process at a cost of $7,200. The output from the

process was 1,250 units. Normal loss is 20% of the input quantity. Any lost units

have a scrap value of $0.40 per litre.

20 Process 1 and Process 2

A manufacturing company operates two processes. Output from Process 1 is

transferred as input to Process 2. Output from Process 2 is the finished product.

Data for the two processes in January are as follows:

Practice questions

Process 1

Opening work in process Nil

Units introduced into the process 14,000

Units completed and transferred to the next process (Process 2) 10,000

Closing work-in-progress 4,000

Material cost added during the period $70,000

Conversion cost added during the period $48,000

Materials are input into Process 1 at the start of the process and conversion costs are

incurred at a constant rate throughout processing. The closing work-in-progress in

Process 1 at the end of January is estimated to be 50% complete for the conversion

work.

Process 2

Opening work-in-process Nil

Units transferred into the process from Process 1 10,000

Closing work-in-progress 1,000

Units completed and transferred to finished goods inventory 9,000

Costs for the period:

Cost of production transferred from Process 1 $90,000

Conversion cost added during the period $57,000

Added materials during Process 2 $36,000

The materials from Process 1 are introduced at the start of processing in Process 2,

but the added materials are introduced at the end of the process. Conversion costs

are incurred at a constant rate throughout processing. The closing work-in-progress

in Process 2 at the end of January is estimated to be 50% complete.

Required

Calculate:

(a) the cost of completed output from Process 1 and Process 2

(b) the cost of the closing work-in-process in each process at the end of January.

21 Equivalent units

XYZ operates several process production systems.

(a) For Process 5, the FIFO method of valuing opening work-in-progress is used,

and the following details relate to September Year 5.

Opening work-in-process was 600 units, each 80% processed as to materials

and 60% processed as to conversion costs.

Finished output was 14,500 units. There were no abnormal losses or gains.

Closing work-in-process was 800 units, each 70% processed as to materials

and 40% processed as to conversion costs.

Costs of processing during the current period were:

Paper F2: Management accounting

Materials: $36,450

Conversion costs: $17,352.

Required

Calculate the cost per equivalent unit of output produced during September

(= one unit started and completed during the month).

(b) The following details relate to Process 16 in September Year 5:

Opening work-in-progress 2,000 litres, fully complete as to materials and

40% complete as to conversion. The cost of

materials in the opening WIP was $9,860 and

conversion costs in the opening WIP were $4,700.

Material input 24,000 litres, cost $130,540

Conversion costs in the

month

$82,960

Output to process 2 23,000 litres

Closing work-in-progress 3,000 litres, fully complete as to materials and

45% complete as to conversion.

The weighted average cost system is used for inventory valuation in Process 16.

Required

Calculate the cost per unit of output from this process during September.

22 Joint process

In a joint process, two joint products are made, Product A and Product B. There are

no inventory of work-in-process. Information relating to last month’s production is

set out in the table below.

Joint

product

Opening

inventory

Closing

inventory

Sales

units units units

A 800 1,200 8,000

B 700 300 10,000

The costs of the joint process in the month were $144,000. These are apportioned

between the joint products on the basis of units produced.

Required

Calculate the joint processing costs for the month that are charged to each product.

23 Sales budget

A company makes and sells two products, Product A and Product B. The sales price

and expected sales volume for each product next year are as follows:

ACCA F2 Management Accounting - 2010 - Study text - Emile Woolf Publishing

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