EXAMNATION NO.

_____________________

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2013 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC9: COSTING AND BUDGETARY CONTROL

TUESDAY 4 JUNE 2013 TIME ALLOWED : 3 HOURS

9.00 AM - 12.00 NOON

INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during
which you should read the question paper and, if you wish, make annotations on the
question paper. However, you are not allowed, under any circumstances, to open the
answer book and start writing or use your calculator during this reading time.

2. Number of questions on paper – 7.

3. FIVE questions ONLY to be answered.

4. Each question carries 20 marks.

5. Show all your workings in order to gain full marks.

6. Marks will be awarded for clarity, correctness and logical presentation.

7. Use of non-programmable calculators is allowed.

8. Begin each answer on a fresh page.

9. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE

INVIGILATOR.

This question paper contains 9 pages

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1. The following statement has been produced for presentation to the general manager of
Department X:

Month ended 31 October

Original budget Actual result Variance
K K K
Sales 600,000 550,000 (50,000)
Direct materials 150,000 130,000 20,000
Direct labour 200,000 189,000 11,000
Production overhead:
Variable with direct labour 50,000 46,000 4,000
Fixed 25,000 29,000 (4,000)

Variable selling overhead 75,000 72,000 3,000

Fixed selling overhead 50,000 46,000 4,000
Total costs 550,000 512,000 38,000
Profit 50,000 38,000 (12,000)
Direct labour hours 50,000 47,500
Sales and production units 5,000 4,500

There are no opening and closing stocks.

The general manager says that this type of statement does not provide much relevant
information for him. He also thought that the profit for the month would be well up to
budget and was surprised to see a large adverse profit variance.

Required

(a) Define the term ‘flexible budget’. 2 Marks

(b) Re-draft the above statement in a form which would be more relevant for the
general manager using flexible budget principles. 10 Marks

(c) Calculate the following variances using variable costing approach:

(i) Sales volume 2 Marks

(ii) Sales price 2 Marks
(iii) Labour rate 2 Marks
(iv) Labour efficiency 2 Marks
(TOTAL: 20 MARKS)

Continued/……
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2. Mongolia Ltd is a small specialist manufacturer of electronic components and much of its
output is used by the makers of aircraft for both civil and military purposes. One of the
few aircraft manufacturers has offered a contract to Mongolia Ltd for the supply, over the
next twelve months, of 400 identical components.

The data relating to the production of each component is as follows:

(1) Material requirements:
3kg material M1
2kg material P2
1 Part No. 678

Material M1 is in continuous use by the company. 1,000 kg are currently held in

stock at a book value of K4.70 per kg but it is known that future purchases will
cost K5.50 per kg. 1,200 kg of material P2 are held in stock. The original cost of
this material was K4.30 per kg but as the material has not bee n required for the
last two years, it has been written down to K1.50 per kg scrap value. The only
foreseeable alternative use is a substitute for material P4 (in current use) but this
would involve further processing costs of K1.60 per kg. The current cost of
material P4 is K3.60 per kg. Part No.678 is currently not in stock and will cost
K50 per unit.

(2) Labour requirements: each component would require five hours of skilled labour
and five hours of semi-skilled labour. An employee possessing the necessary
skills is available and is currently paid K5 per hour. A replacement would,
however, have to be obtained at a rate of K4 per hour for the work which would
otherwise be done by the skilled employee. The current rate of semi- skilled work
is K3 per hour and an additional employee could be appointed for this work.

(3) Overhead: Mongolia Ltd absorbs overhead by a machine hour rate, currently K20
per hour of which K7 is for variable and K13 for fixed overhead. If this contract
is undertaken, it is estimated that fixed costs will increase for the duration of the
contract by K3,200. Spare machine capacity is available and each component
would require four machine hours.

A price of K145 per component has been suggested by the large company which
makes aircrafts.

Required:
(a) Define the following terms:

(i) Fixed cost 1 Mark

(ii) Sunk cost 1 Mark
(iii) Relevant cost 1 Mark

Continued/……
 3

(b) State whether or not the contract should be accepted and support your
conclusion with appropriate figures for presentation to management.
11 Marks

(c) Mention any three factors which management ought to consider and
which may influence their decision. 6 Marks
(TOTAL: 20 MARKS)

Continued/……
 4

3. The budgeted information for Zeta Ltd for the month of May 2013, analyzed by
product, is shown below:

Product A Product B Product C

Sales units (‘000) 225 376 190
Selling price (K per unit) 11.00 10.50 8.00
Variable costs (K per unit) 5.80 6.00 5.20
Attributable fixed costs (K’000) 275 337 296

General fixed costs, which are apportioned to products as a percentage of sales,

are budgeted at K1,668,000.

Required:

(a) State any five assumptions behind the cost-volume-profit (CVP)analysis.

5 Marks

(b) (i) Calculate the budgeted profit/loss for each of the products produced by
Zeta Ltd and in total for the month of May 2013. 7 Marks

a. Recalculate the budgeted profit of Zeta Ltd on the assumption that product C
is discontinued, with no effect on sales of the other two products.
4 Marks

b. Additional advertising (to that included in the budget) for Product A

amounting K156,000 is being considered.

Required:

Assuming that all other existing fixed costs will remain unchanged,
calculate the minimum extra sales units of Product A required to cover the
extra advertising expenditure. 4 Marks
(TOTAL: 20 MARKS)

Continued/……
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4. A company produces a single product from one of its manufacturing processes. The
following information of process inputs, outputs and work in progress relates to the most
recently completed period:

Kg
Opening work- in-progress 21,700
Materials input 105,600
Output completed 92,400
Closing work-in-progress 28,200

The opening and closing work-in-progress are 60% and 50% respectively complete as to
conversion costs. Losses occur at the beginning of the process and have a scrap value of
K0.45 per kg.

The opening work- in-progress included raw material costs of K56,420 and
conversion costs of K30,597. Costs incurred during the period were as follows:

K
Materials input 276,672
Conversion costs 226,195

Required:

(a) In process costing, state the costing treatment of the following:

(i) Normal loss 2 Marks

(ii) By-products 2 Marks

(b) Calculate the unit cost of production (K per kg to four decimal places) using:

(i) the weighted average method of valuation, assuming that all losses are
treated as normal. 6 Marks

(ii) the FIFO method of valuation assuming that normal losses are 5% of
material input. 6 Marks

(c) Prepare the process account based on (b)(ii) above. 4 Marks

(TOTAL: 20 MARKS)

Continued/……
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5. PQR Ltd is an engineering company engaged in the manufacture of components and

finished products. The company is highly mechanized and each of the components and
finished products requires the use of one or more types of machine in its machining
department. The following costs and revenues (where appropriate) relate to a single
component or unit of the finished product:

Components Finished products

A B C D
K K K K
Selling price 127 161
Direct materials 8 29 33 38
Direct wages 10 30 20 25
Variable overhead:
Drilling 6 3 9 12
Grinding 8 16 4 12
Fixed overhead:
Drilling 12 6 18 24
Grinding 10 20 5 15
54 104 89 126

The following information is also available:

(1) The labour hour rate is K5 per hour

(2) Overhead absorption rates per machine hour are as follows:
Variable Fixed
K K
Drilling (per hour) 3 6
Grinding (per hour) 4 5

(3) Components A and B are not used in the finished products C and D. They are
used in the company’s other products, none of which use s the drilling and
grinding machines. The company does not manufacture any other components.

(4) The number of machine drilling hours available is limited to 1,650 per week.
There are 2,500 machine grinding hours available per week. These numbers of
hours have been used to calculate the absorption rates stated above.

(5) The maximum demand in units per week for each of the finished products has
been estimated by the marketing director as follows:

Product C 250 units

Product D 500 units

Continued/……
 7

(6) The internal demand for components A and B each week is as fo llows:

Component A 50 units
Component B 100 units

(7) There is no external market for components A and B.

(8) PQR Ltd has a contract to supply 50 units of each of its finished products to a
major customer each week. These quantities are included in the maximum units of
demand given in note (5) above.

Required:

(a) Define the term ‘limiting factor’ of production. 2 Marks

(b) Calculate the number of units of each finished product that PQR Ltd should
produce in order to maximize its profits and also the profit per week which this
should yield. 13 Marks

(c) The production director has now discovered that he can obtain unlimited
quantities of components identical to A and B for K50 and K96 per unit
respectively from a supplier as opposed to manufacturing in-house.

Required:

State whether this information changes the production plan of the company if it
wishes to continue to maximize profits per week. If appropriate, state the revised
production plan and the net benefit per week caused by the change to the
production plan. 5 Marks
(TOTAL : 20 MARKS)

Continued/……
 8

6. Vyakurya Ltd makes three main products, using broadly the same production methods
and equipment for each. A conventional product costing system is used at present,
although an activity-based costing (ABC) system is being considered. Details of the
three products for a typical period are as follows:

Hours per unit

Labour hrs Machine hrs Materials per unit Volume
Product X ½ 1½ K20 750
Product Y 1½ 1 K12 1,250
Product Z 1 3 K25 7,000

Direct labour costs K6 per hour and production overheads are absorbed on a machine
hour basis, of which the rate for the period is K28 per machine hour.

Required:

(a) Describe the differences between activity-based and traditional costing systems.
3 Marks
(b) Calculate the cost per unit for each product using conventional methods. 3 Marks

(c) Further analysis shows that the total of production overload can be divided as
follows:
%
Costs relating to set-ups 35
Costs relating to machinery 20
Costs relating to materials handling 15
Costs relating to inspection 30
100

The following activity volumes are associated with the product line for the period
as a whole :

No. of material
No. of set-ups Movements No. of inspections

Product X 75 12 150
Product Y 115 21 180
Product Z 480 87 670
670 120 1,000

Required:

Calculate the cost per unit for each product using ABC principles. 14 Marks
(TOTAL: 20 MARKS)

Continued/……
 9

7. (a) In the context of budgeting:

(i) State any four criticisms of budgeting. 4 Marks

(ii) State any four advantages of zero-based budgeting (ZBB). 4 Marks

(b) Mention any four disadvantages of standard costing. 4 Marks

(c) (i) Distinguish between job costing and process costing. 2 Marks
(ii) Mention four methods used in allocating joint costs to joint products in
process costing. 4 Marks

(d) Explain why, in the short-term, some costs and revenues are not relevant for
decision making. 2 Marks
(TOTAL : 20 MARKS)

END