Professional Documents
Culture Documents
Cost Accounting
Level 3
Model Answers
Series 4 2008 (3017)
Model Answers have been developed by EDI to offer additional information and guidance to Centres,
teachers and candidates as they prepare for LCCI International Qualifications. The contents of this
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(2) Model Answers – summary of the main points that the Chief Examiner expected to
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plus a fully worked example or sample answer (where applicable)
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QUESTION 1
Twist and Turn manufactures and sells its single product at £16 per unit. The company, which
currently has a monthly production capacity of 5,000 units, has orders for and plans to sell, 4,500 units
in the next month. The following information is available:
Total monthly costs, for production and sales of 4,500 units and 5,000 units are estimated at £48,000
and £51,000 respectively.
The company only manufactures to sales orders received and keeps no stock.
REQUIRED
A mail order company has approached Twist and Turn with the following two order options
This is in addition to the sales orders already received by Twist and Turn and must be completed
during next month’s production. Twist and Turn can increase its monthly manufacturing capacity to
5,500 units by hiring additional equipment at a cost of £2,500 per month. No changes in variable
costs are expected.
REQUIRED
(b) Advise Twist and Turn, using supporting calculations, whether either of the mail order options
should be accepted.
(6 marks)
(Total 20 marks)
3017/4/08/MA Page 1 of 14
MODEL ANSWER TO QUESTION 1
Workings:
3017/4/08/MA Page 2 of 14
MODEL ANSWER TO QUESTION 1 CONTINUED
Advice
Advise company to accept option (ii) as this option will generate £1,000 more profit than option (i).
3017/4/08/MA Page 3 of 14
QUESTION 2
A company produces a single product. The company uses standard costing and has produced the
following budgeted and actual Manufacturing and Trading accounts for a period.
Fixed overheads are absorbed at a predetermined rate based on direct labour hours.
Standard direct labour is 2 hours per unit.
Actual direct labour worked was 470 hours.
REQUIRED
(b) Reconcile the budgeted gross profit with the actual gross profit using the variances calculated in
part (a).
(3 marks)
(c) Calculate the following fixed overhead variances for the period:
(i) expenditure
(ii) volume
(iii) capacity
(iv) efficiency.
(8 marks)
(d) Explain the difference between an ideal and an attainable standard. (3 marks)
(Total 20 marks)
3017/4/08/MA Page 4 of 14
MODEL ANSWER TO QUESTION 2
Workings:
Workings:
A standard which makes no allowance for normal loss, waste and machine down time and
therefore only attainable under most favourable conditions.
Attainable standard
Standards set at a level which assumes efficient levels of operation but includes allowances for
normal loss, waste and machine down time.
3017/4/08/MA Page 5 of 14
QUESTION 3
Sole Product Ltd manufactures and sells a single product. The product is produced in two
departments (machining and finishing) before being packed into boxes in the dispatch department.
The company has provided the following budgeted information.
Planned production and sales for the next period are as follows:
There is no stock of packed or unpacked products, direct material or packing boxes at the beginning of
the period.
At the end of the period it is expected to have no stock of packing boxes and 400 units unpacked in
the dispatch department.
REQUIRED
Produce budgeted manufacturing and trading account for the period using:
(Total 20 marks)
3017/4/08/MA Page 6 of 14
MODEL ANSWER TO QUESTION 3
Budgeted Manufacturing and Trading Account for the period (Absorption Costing)
£ £ £
Sales (1,500 x £20) 30,000
Direct material (2,000 x £2.50) 5,000
Direct labour – Machine dept (2,000/100 x £8 x 5) 800
– Finishing dept (2,000/20 x £10 x 4) 4,000
Labour – dispatch dept (1,600/20 x £8) 640
Material – Packing boxes (1,600 x £0.50) 800 11,240
Fixed overheads
Machine dept (2,000/100 x £15 x 4) 1,200
Finishing dept (2,000/20 x £12 x 4) 4,800
Dispatch dept (1,600 x £1) 1,600 7,600
18,840
Less closing stock of work in progress (unpacked products) 3,160
Manufacturing cost of products completed 15,680
Less closing stock of completed products 980
Manufacturing cost of sales 14,700
Gross profit 15,300
Workings:
3017/4/08/MA Page 7 of 14
MODEL ANSWER TO QUESTION 3 CONTINUED
(b) Budgeted Manufacturing and Trading Account for the period (Marginal Costing)
£ £ £
Sales 30,000
Direct material 5,000
Direct labour – Machine dept 800
– Finishing dept 4,000
Labour – dispatch dept 640
Material – Packing boxes 800
Variable cost of production 11,240
Less closing stock of work in progress (unpacked products) 1,960
9,280
Less closing stock of completed products 580
Variable production cost of sales 8,700
Contribution 21,300
Less Fixed overheads 7,600
Gross profit 13,700
Workings:
3017/4/08/MA Page 8 of 14
QUESTION 4
A haulage company, which operates a fleet of 10 similar heavy goods vehicles and employs 10
drivers, has prepared the following monthly flexible budget based on the number of contracted jobs.
Income from customers is generated by charging a rate per km proportional to the contracted distance
travelled.
Drivers are paid a fixed wage plus a variable wage proportional to the total vehicle distanced travelled.
REQUIRED
(a) Prepare a statement for Month 1 showing for each budgeted item the following:
(b) Briefly explain the main difference between flexible and fixed budgets.
(4 marks)
(Total 20 marks)
3017/4/08/MA Page 9 of 14
MODEL ANSWER TO QUESTION 4
3017/4/08/MA Page 10 of 14
MODEL ANSWER TO QUESTION 4 CONTINUED
Workings:
Fuel costs
(Variable cost)
Contracts Total distance traveled (km) Cost per km (£)
160 32,000 + 24,000 = 56,000 11,200/56,000 = £0.20 per km
Vehicle travel for 204 contracts = 40,800 + 30,600 = 71,400km
Fuel cost = 71,400 x £0.20 = £14,280
Drivers wages
(Semi-variable cost)
Variable wage cost
Over contract range 160:180 = (14,450 – 13,400)/(63,000 – 56,000) = £0.15 per km
Total wage = Fixed wage + (Total variable wage
per km travelled)
Using 220 contracted jobs per month
16,550 = Fixed wage + (0.15 x 77,000)
Fixed wage = 16,550 – 11,550 = £5,000
Total wage = £5,000 + 0.15 x vehicle travel
204 contracts = 5,000 + 71,400 x 0.15 = £15,710
Office costs
(Semi-variable cost)
Variable cost
Over contract range 160:180 = (1,140 – 1,280)/(180 – 160) = £8 per contract
Total cost = Fixed cost + (Total variable wage
per contract)
Using 200 contracted jobs per month
2,600 = Fixed cost + (8 x 200)
Fixed cost = 2,600 - 1,600 = £1,000
Total cost = £1,000 + £8 per contract
204 contracts = 1,000 + 204 x 8 = £2,632
(b) A fixed budget is normally set prior to the start of an accounting period and used for planning
purposes. It is based on one level of activity.
A flexible budget, used for control purposes, changes in response to changes in activity by
recognising different cost behaviour patterns.
3017/4/08/MA Page 11 of 14
QUESTION 5
Makeit Ltd maintains a cost ledger which is kept separate to the financial ledger. At the beginning of
month 2 the following balances remained in the cost ledger.
£000 £000
Raw material Account 70
Finished Goods Control Account 90
Work in Progress Control Account 60
Production Overhead Control Account (over absorbed) 5
Financial Ledger Control Account 215
220 220
£000
Raw material purchases 110
Total factory wages 100
Indirect production expenses 75
Sales 400
At the end of Month 2, the following stocks, valued at cost, were recorded:
Notes
REQUIRED
(a) Record the above transactions in the cost ledger accounts for month 2. (16 marks)
(Total 20 marks)
3017/4/08/MA Page 12 of 14
MODEL ANSWER TO QUESTION 5
(a)
Raw Material Control Account
£000 £000
Opening Balance 70 W in P Control 108
Fin Led Control 110 Prod Overhead Cont 12
Closing Balance 60
180 180
Workings:
Material issued (180 - 60) = 120, 10% indirect = 12 and 90% direct = 108
3017/4/08/MA Page 13 of 14
MODEL ANSWER TO QUESTION 5 CONTINUED
Sales Account
£000 £000
Profit/Loss 400 Fin Led Control 400
400 400
(b) Integrated accounts – a set of accounting records which provide both financial and cost accounts
using common data.
Non-integrated accounts – a system in which the cost accounts are distinct from the financial
accounts, the two sets of accounts being kept in agreement by use of control accounts or
reconciled by other means.