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cpa 2 cost accounting revision 2

By Omosa


PAPER 2 QUESTION ONE a) Explain the meaning of the following terms in regard to the cost and financial accounting systems: i) Integrated cost accounts ii) Interlocking cost accounts iii) Cost ledger control account iv) Cost ledger contra account (12 marks) b) The profit shown in the financial accounts of MRM Co Ltd for the year ended 31st December 2002 is Shs 18,592,000. The cost accounts for the same period reflected a profit of Shs 20,496,000. Comparison of the two set of accounts revealed the following: Stock Valuations Cost Accountants Financial Accountants Raw Materials Shs ‘000’ Shs ‘000’ Opening stock 6,821 7,529 Closing stock 5,483 5,128 Finished goods Opening stock 13,291 12,905 Closing stock 11,430 11,131 Dividends and interests received of Shs 500,000 and Shs 52,000 respectively were reflected in the financial accounts. The company disposed a production machine costing Shs 5 million for Shs 0.25 million. It had been depreciated to the extent of Shs 3 million. REQUIRED Prepare a reconciliation for the cost and financial profits for the period. (8 marks) QUESTION TWO Dynamic Limited manufactures three products X, Y and Z. All the three products pass through a common finishing section whose total machine time is 3000 hours per month. The time requirement in finishing section for each products X, Y and Z is 20 minutes, 10 minutes and 15 minutes respectively. The company employs budgetary control and the following is the monthly sales budget which can be considered relatively stable: Product: Sales Revenue Budget X: 648,000 Y: 05,000 805,000 Z: 960,000 2,413,000 The price structure relating to each product is set out below: Particulars Product: X Y Z Raw materials 50 80 100 Direct labour 30 70 50 Fixed overheads 60 30 50 Profit margin 40 50 40 Selling price 180 230 240 Four of the available machines in the finishing section have recently been destroyed by fire limiting the available machine hours to 2,100 hours which is not enough to meet the normal products demand. The replacement of these machines will need at least 18 months. Meanwhile, the company has decided as a matter of policy to produce at least 2,000 units of each product so a s not to lose the market contact while utilizing the balance of the machine capacity in the most profitable manner. However, in no case would production of any product exceed the previous production level which was determined by the existing market demand. Required: a) The quantities of each product that the company should produce each month under the current market conditions so a s to meet the requirements of its policy. b) The revised budgeted profit in Units and monetary values. c) The original budgeted profit in units and monetary values. d) What I the effect of the company’s policy on its profitability? Comment on the adequacy of this policy in a highly competitive market. QUESTION THREE Eagle Construction Company Ltd won the contract for building the Accountancy School extension of Strathmore University at a cost of Sh 120 million. For the Company’s financial year ended 31st March 2003, the following information is available: Shs ‘000’ Material issued to the site 21,500 Cost of labour 3,600 Plant installed 18,000 Direct expenses 4,800 Administration changes (general) 1,750 Materials returned to stores 2,500 Work certified 25,000 Cost of work not certified 7,000 Closing stocks of materials 2,000 Accrued expenses (wages) 300 Value of plant on 31st march 2003 12,000 Payments from the college 20,000 REQUIRED: a) Prepare the: i) Contract account (10 marks) ii) Contractee’s account (5 marks) iii) Computation to show the profit or loss to be taken to the company’s income statement for the year. Explain why you have used the method you have adopted. (5 marks) QUESTION FOUR The data below relates to operations of XYZ Ltd, a manufacturing company that employs normal job costing. All jobs pass through the company’s two departments, preparation and finishing. PREPARATION DEPARTMENT FINISHING DEPARTMENT Direct Materials 600,000 60,000 Direct labour 480,000 120,000 Factory overheads 240,000 180,000 Direct labour hours 120,000 45,000 Machine hours 60,000 30,000 The following information relates to job No. 31 undertaken by the company during the year: PREPARATION DEPARTMENT FINISHING DEPARTMENT Direct Materials 60,000 120,000 Labour (Direct) 24,000 18,000 Factory overheads 240,000 180,000 Direct labour hours 25,000 1,600 Machine hours 20,000 2,000 The company employs the same overhead absorption method in the two departments. REQUIRED: a) Using the direct labour hours and machine hours as the overhead absorption basis in each of the two departments, compute the cost for the job. Comment on your results. (16marks) b) What basic criteria guides the choice of an appropriate overhead absorption method in job costing? (4 marks) QUESTION FIVE A company manufactures small assemblies to order and has the following budgeted overheads for the year, based on normal activity levels: Department Budgeted overheads Overhead Absorption Base Blanking 8,000 1,500 labour hours Machining 23,000 2,500 machine hours Welding 10,000 1,800 labour hours Assembly 5,000 1,000 labour hours Selling and administrative overheads are 20% of factory cost. An order for 250 assemblies type 3RR made as Batch B3RR incurred the following costs: Materials: Shs 3,107. Labour: 128 hours at the blanking shop at Shs 2.25 per hour. 452 hours at the Machining shop at Shs 2.50 per hour. 90 hours at the Welding shop at Shs 2.25 per hour. 175 hours at the Assembly shop at Shs 1.80 per hour. Sh 525 was paid for the hire of a special equipment for testing the batch items. After the direct labour time in the machining department, the batch spent an extra 191 hours in the department undergoing special treatment, which incurred overheads at the normal rate. REQUIRED: Compute the batch cost and profit as well as the unit cost and profit. (20 marks) SECTION II QUESTION SIX With reference to accounting for overheads in the cost centers of an organization, explain the relevance of Activity Based Costing (ABC) in allocating costs to products. (20 marks) QUESTION SEVEN a) Explain 5 basis of overhead absorption (10 marks) b) (i) Explain the relevance of Materials Requisition Planning in Stock Management. (6 marks) (Total: 20 marks)

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