Cost Accounting

QUESTION 1

a) i) Advantages of FIFO
 It is an actual cost system
 Unrealized profit and losses do not arise because it is an actual cost system
 The resulting stock balances is usually a fair representation of current commercial
values
 It is based on the sound principle that earlier purchases will be used up first

ii) Disadvantages of FIFO

 Product cost based on the oldest material prices, lag behind current conditions
 Administratively troublesome and expensive in operation to keep track of each
batch of materials
 Renders cost comparison between job difficult because the materials issue price
may vary from batch to batch even through issued on the same day.
 In period of rising prices (inflation), product cost are overstated and profits
understated

b) i) Advantages of LIFO
 It is an actual cost
 Product cost will tend to be close to current prices and therefore be more realistic
 In period of rising prices, (inflation), profits are understated. This provides a
hedge against inflation
 As the resulting profit ratio tend to be more stable, year by year, the accounting
information produced is a more reliable guide to management

ii) Disadvantages of LIFO

 Frequently result in many batches being only partly charged to production when
new batches arrive
 Closing stocks on hand will be valued at oldest price
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 Administratively clumsy
 Renders cost comparison between jobs difficult

c) i) Advantages of Weight Average

 Less complicated to administer than FIFO and LIFO
 Comparison between jobs made slightly easier
 When price are fluctuating, this method is more likely to give more satisfactory
results than FIFO and LIFO
 Because it is based on actual costs, no unrealized stock profits or loss occurs

ii) Disadvantages of Weight Average

 It does not represent actual buying price

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d) Store Ledger Entries

a) FIFO

Date Receipts Issued Balances

Quantity Prices RM Quantity Prices RM Quantity Prices RM
Jan 1 300 3 900
5 250 3.20 800 300 3 900
250 3.20 800
7 150 3 450 150 3 450
250 3.20 800
9 250 3.25 812.50 150 3 450
250 3.20 800
250 3.25 812.50
13 150 3 450 200 3.20 640
50 3.20 160 250 3.25 812.50
18 120 3.20 384 80 3.20 256
250 3.25 812.50
23 250 3.30 825 80 3.20 256
250 3.25 812.50
250 3.30 825
27 80 3.20 256 150 3.25 487.50
100 3.25 325 250 3.30 825
400 1312.50

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b) LIFO

Date Receipts Issued Balances

Quantity Prices RM Quantity Prices RM Quantity Prices RM
Jan 1 300 3 900
5 250 3.20 800 300 3 900
250 3.20 800
7 150 3.2 480 300 3 900
100 3.20 320
9 250 3.25 812.50 300 3 900
100 3.20 320
250 3.25 812.50
13 200 3.25 650 300 3 900
100 3.20 320
50 3.25 162.50
18 50 3.25 384 300 3 900
70 3.20 224 30 3.20 96
23 250 3.30 825 300 3 900
30 3.20 96
250 3.30 825
27 180 3.30 594 300 3 900
30 3.20 96
70 3.30 231
400 1227

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c) Weight Average

Date Receipts Issued Balances

Quantity Prices RM Quantity Prices RM Quantity Prices RM
Jan 1 300 3 900
5 250 3.20 800 550 3.09 1699.50
7 150 3.09 463.50 400 3.09 1236
9 250 3.25 812.50 650 3.15 2047.50
13 200 3.15 630 450 3.15 1417.50
18 120 3.15 378 330 3.15 1039.50
23 250 3.30 825 580 3.21 1861.80
27 180 3.21 577.80 400 3.21 1284

Answer: RM1284.

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QUESTION 2

1. Direct material cost = ( Production Overhead/Direct Material Cost ) x 100

= ( RM45 000/RM15 000 ) x 100
= 300%
Direct labour cost = ( Production Overhead/Direct Labour Cost ) x 100
= ( RM45 000/RM45 000 ) x 100
= 100%
Labour hours = ( Production Overhead/Labour hours ) x 100
= ( RM45 000/30 000 ) x 100
= 150%
Machine hours = ( Production Overhead/Machine hours ) x 100
= ( RM45 000/22 500) x 100
= 200%
Output (Units) = ( Production Overhead/Output ) x 100
= ( RM45 000/3 000) x 100
= 1 500%

2. Material cost = Material cost x Material cost rate

= RM10 x 300%
= RM30
Labour cost = Labour cost x Labour cost rate
= RM25 x 100%
= RM25
Labour hours = Labour hours x Labour hours rate
= 15 x 150%
= RM30
Machine hours = Machine hours x Machine hours rate
= 7.5 x 200%

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= RM30

 Budgeted cost :

Material cost : Budgeted direct material cost / Budgeted output

: RM15 000 / 3 000
: RM5

Labour cost : Budgeted direct labour cost / Budgeted output

: RM45 000 / 3 000
: RM15

Labour hours : Budgeted labour hours / Budgeted output

: 30 000 / 3 000
: 10

Machine hours : Budgeted machine hours / Budgeted output

: 22 500 / 3 000
: 7.5

Material Labour Labour Machine

Cost Cost Hours Hours
Budgeted RM5 RM15 10 7.5
Actual RM10 RM25 15 7.5
Absorption Under Under Under Nil

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