Cost

Accounting
Level 3

Model Answers
Series 3 2008 (Code 3016)

1 ASE 3016 2 06 1
3016/2/06 >f0t@W9W2`?[6ZBkBwGc#
Cost Accounting Level 3
Series 3 2008

How to use this booklet

Model Answers have been developed by Education Development International plc (EDI) to offer
additional information and guidance to Centres, teachers and candidates as they prepare for LCCI
International Qualifications. The contents of this booklet are divided into 3 elements:

(1) Questions – reproduced from the printed examination paper

(2) Model Answers – summary of the main points that the Chief Examiner expected to
see in the answers to each question in the examination paper,
plus a fully worked example or sample answer (where applicable)

(3) Helpful Hints – where appropriate, additional guidance relating to individual

questions or to examination technique

Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success.

EDI provides Model Answers to help candidates gain a general understanding of the standard
required. The general standard of model answers is one that would achieve a Distinction grade. EDI
accepts that candidates may offer other answers that could be equally valid.

© Education Development International plc 2008

All rights reserved; no part of this publication may be reproduced, stored in a retrieval system or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise
without prior written permission of the Publisher. The book may not be lent, resold, hired out or
otherwise disposed of by way of trade in any form of binding or cover, other than that in which it is
published, without the prior consent of the Publisher.

Page 1 of 17
QUESTION 1

A company uses a two stage processing system to jointly produce its three main products, Products A,
B and C. By-product D is also produced during the process.

Product A is complete at the end of stage 1 and Products B, C and By-product D emerge at the end of
stage 2.

Information regarding the joint process for the last period is as follows:

Input
Process stage 1
Raw material X 360 kg at £6 per kg
Raw material Y 400 kg at £5 per kg
Direct labour 510 hrs at £8 per hr

Process stage 2
Raw material Z 800kg at £4 per kg
Direct labour 200hrs at £8 per hr

Factory overheads in each process stage are absorbed at £12.00 per direct labour hour.

Output
Process stage 1 Quantity Selling price per kg
Product A 120 kg £30
Material transfer to stage 2 600 kg -
Process stage 2
Product B 650 kg £20
Product C 550 kg £25
By-product D 150 kg £8

Process losses from stage 1 are disposed of at a cost of £1 per kg. The losses that occurred in stage
1, in the last period, were normal.

No losses are expected in stage 2.

There was no work in progress at the beginning or at the end of the period in either process stage.

Joint processing costs are apportioned on the basis of relative weight of output.

REQUIRED

(a) For the last period prepare the process accounts for:
(i) Process stage 1
(ii) Process stage 2
(12 marks)

(b) Assuming that all production was sold prepare a profit statement for the last period. (4 marks)

(c) Explain the meaning of:

(i) Joint products
(ii) By-product
(4 marks)

(Total 20 marks)

Page 2 of 17
MODEL ANSWER TO QUESTION 1

(a)

Process stage 1 account

kg £ kg £
Material X 360 2160 Product A 120 2400
Material Y 400 2000 Transfer to process 2 600 12000
Labour 4080 Normal loss 40
Overheads 6120
Process loss/disposals 40
760 14400 760 14400

Workings:
Product A 14,400 x 120/720 = £2,400
Transfer to process 2 14,400 x 600/720 = £12,000
or
Cost per kg = 14,400/(760 – 40) = £20 per kg
Product A £20 x 120 = £2,400
Transfer to process 2 £20 x 600 = £12,000

Process stage 2 account

kg £ kg £
Process 1 600 12000 Product B 650 9360
Material Z 800 3200 Product C 550 7920
Labour 1600 By-Product D 150 1200
Overheads 2400 Abnormal loss 50 720
1400 19200 1400 19200

Workings:
Product B (19,200 – 1,200) x 650/1,250 = £9,360
Product C (19,200 – 1,200) x 550/1,250 = £7,920
Abnormal loss (19,200 – 1,200) x 50/1,250 = £720
or
Cost per kg = (19,200 – 1,200)/(1,400 – 150) = £14.40 per kg
Product B (14.40 x 650) = £9,360
Product C (14.40 x 550) = £7,920
Abnormal loss (14.40 x 50) = £720

Page 3 of 17
MODEL ANSWER TO QUESTION 1 CONTINUED

(b)
Profit Statement (£)
Product A B C Total
Sales 3600 13000 13750 30350
Process costs 2400 9360 7920 19680
10670
Less abnormal loss 720
Process Profit 9950

(c) (i) Joint products

Two or more products separated in processing, each having a sufficiently high saleable value
to merit recognition as a main product.
(ii) By-product
A product that has commercial value but is not the product, or products, for which the
production process is intended.

Page 4 of 17
QUESTION 2

A company manufactures and distributes a single product. The variable costs per unit are as follows:

Direct materials £60.00

Direct labour £25.00
Variable overheads £15.00

The product sells for £125.00 per unit and the company expects total sales revenue in this current
year of £1,250,000. Fixed overheads are forecasted at £200,000 for the year.

REQUIRED

(a) Calculate for the current year the:

(i) break-even point in units
(ii) contribution/sales ratio
(iii) margin of safety as a percentage of sales
(iv) expected profit.
(8 marks)

The following changes in cost are expected in the following year:

Raw material prices to increase by 5%
Direct wage rate to increase by 4%
Variable overheads to rise by 8% per unit of product
Fixed overheads to increase by £17,800.

REQUIRED

(b) Calculate for the following year:

(i) a new selling price that maintains the current year’s contribution/sales ratio
(ii) the sales volume required to maintain the current year’s margin of safety percentage if the
selling price remains at £125
(iii) the sales volume required to maintain the current year’s profit if the selling price remains at
£125.
(12 marks)

(Total 20 marks)

Page 5 of 17
MODEL ANSWER TO QUESTION 2

(a)
£/unit £/unit
Selling price 125.00
Direct materials 60.00
Direct labour 25.00
Variable o/heads 15.00
100.00
Contribution 25.00

(i) Breakeven = Fixed overheads/unit contribution

= 200,000/25
= 8,000 units

(ii) Contribution/sales ratio = 25/125

= 20%

(iii) Margin of safety [(Sales volume – break-even)/Sales volume] x 100%

= [(10,000 – 8,000)/10,000] x 100%
= 20%

(iv) Expected profit = Total contribution – fixed overheads

= 20% x 1,250,000 – 200,000
= £50,000

(b) Variable costs for following year:

£
Direct material 63.0
Direct labour 26.0
Variable o/heads 16.2
105.2

(i) Selling price

Contribution/sales ratio = Selling price – unit variable cost
Selling price
0.20 = SP – 105.2
SP
SP (0.20 – 1) = -105.2
SP (1 – 0.20) = 105.2
SP = 105.2/0.8
Selling price = £131.50

(ii) Sales volume (margin of safety)

Break-even = Fixed overheads/unit contribution
= 200,000 + 17,800
125 – 105.2
= 11,000 units

Margin of safety = Sales volume – break-even

Sales volume
0.20 = SV – 11,000
SV
SV (1 – 0.20) = 11,000
Sales volume = 13,750 units

Page 6 of 17
MODEL ANSWER TO QUESTION 2 CONTINUED

(iii) Sales volume (profit)

Total contribution required = Current years profit + increased fixed overheads
= 50,000 + 217,800
= £267,800
Sales volume required = 267,800/(125 – 105.2)
13,525 units

Page 7 of 17
QUESTION 3

A company, which produces a single product and uses a standard costing system, prepares a monthly
reconciliation statement showing the variances between standard production costs and actual costs.

The following is the statement for the month just ended.

Standard cost of production £28,560

Variances:
Material price 1360A
Material usage 200A
Labour rate 300A
Labour efficiency 320F
Fixed overhead expenditure 600A
Fixed overhead volume 480F 1,660A
Actual cost of production £30,220

Actual production for the month 420 units

The standard direct cost for one unit was as follows:

Direct materials 8 kg @ £4 per kg

Direct labour 2 hours @ £8 per hour

Fixed production overheads are absorbed at a rate of £10 per direct labour hour.

REQUIRED

(a) Calculate for the month just ended:

(i) the actual quantity of direct materials used and the total actual direct material cost (assume
usage quantity equals purchased quantity)
(ii) the actual direct labour hours worked and the actual direct labour cost
(iii) the actual fixed production overhead incurred
(iv) the budgeted production units.
(14 marks)

(b) State possible reasons for the variances on:

(i) Direct material
(ii) Direct labour.
(6 marks)

(Total 20 marks)

Page 8 of 17
MODEL ANSWER TO QUESTION 3

(a) (i) Material usage variance = Std price (Std usage for actual prod – actual usage)
200A = 4 [(420 x 8) – actual usage]
Actual quantity of direct material used = 3,410 kg
Material price variance = (Actual usage x std price) – actual cost
1360A = (3410 x 4) – actual cost
Actual direct material cost = £15,000

(ii) Labour efficiency variance = Std rate (std hours for actual production – actual hours)
320F = 8 (2 x 420 – actual hours)
Actual direct labour hours worked = 800 hours
Labour rate variance = (Actual hours x std rate) – actual cost
300A = (800 x 8) – actual cost
Actual direct labour cost = £6,700

(iii) Fixed overhead volume variance = (Std rate x std dir lab hours for actual production)
- budgeted overhead
480F = (10 x 2 x 420) – budgeted overhead
Budgeted overhead = £7,920
Fixed overhead expenditure variance = Actual overhead – Budgeted overhead
600A = Actual overhead – 7,920
Actual overhead = £8,520

(iv) Budgeted production (units) = Budgeted o/h/Fixed o/h absorption rate per unit
= 7920/10 x 2
= 396 units
Or using Fixed Overhead Volume Variance:
480F = 24
(10 x 2)
Therefore 420 – 24
= 396 units

(b) (i) Direct material variances:

The company’s supplier could have increased the cost per kg (adverse price variance). The
material supplied could have been inferior quality or more scrap was generated than
budgeted for and as a consequence more material than standard could have been used
(adverse usage variance).

(ii) Direct labour variances:

The company could have increased the employees rate of pay (adverse rate variance) which
in turn motivated the employees to complete the work in a time that was quicker than the
standard time (favourable efficiency variance).

Page 9 of 17
QUESTION 4

A company sells four products (P, Q, R, and S). The products are manufactured on a bank of 20
machines, any of which can be used on each of the products. Each machine can produce 101 hours
of work per period.

The following information is provided for the next period:

Product
P Q R S
Units required 60 100 200 150
Selling price (per unit) £104 £76 £72 £92
Direct labour (per unit) 4.0 hrs 2.0 hrs 2.5 hrs 3.0 hrs
Direct materials (per unit) £40 £24 £29 £38
Machine hours (per unit) 5.0 hrs 4.0 hrs 3.0 hrs 6.0 hrs
Fixed overheads (per unit) £6.00 £3.00 £2.00 £5.00
Fixed overheads for the period are £1,720
Direct labour costs £8.00 per hour.

REQUIRED

(a) Calculate the production capacity shortfall (in machine hours) in the next period. (2 marks)

(b) Determine the production quantities of each product which will maximise profit in the next period.

(8 marks)

(c) Prepare a statement showing both contribution and profit for the period based on your answer to
(b) above.
(4 marks)

The company is considering working overtime to overcome the shortfall in production capacity. If
overtime is worked the labour cost per unit will increase by 25%, for the additional hours worked, and
the fixed overheads will increase by £500 per period.

REQUIRED

(d) Advise the company whether to introduce overtime to overcome the production capacity shortfall.
Your advice should be accompanied by calculation.
(6 marks)

(Total 20 marks)

Page 10 of 17
MODEL ANSWER TO QUESTION 4

(a) Capacity shortfall

Machine hours required

Product P 60 x 5 = 300
Product Q 100 x 4 = 400
Product R 200 x 3 = 600
Product S 150 x 6 = 900
2,200
Machine hours available (20 x 101) = 2,020
Capacity shortfall = 180 machine hours

(b) Production quantities

Product P Q R S
Labour (£/unit) 32 16 20 24
Material (£/unit) 40 24 29 38
Variable cost (£/unit) 72 40 49 62
Selling price (£/unit) 104 76 72 92
Contribution (£/unit) 32 36 23 30
Machine hours per unit 5 4 3 6
Cont/machine hour (£) 6.40 9.00 7.67 5.00
Production priority 3 1 2 4
Production schedule:
Product Q 100 units 400 machine hours
Product R 200 units 600 machine hours
Product P 60 units 300 machine hours
Product S 120 units 720 machine hours
2020 machine hours

Workings:
Total machine hours required to produce products Q, R & P = 1,300
Therefore, machine hours available to produce product S = 2,020 – 1,300
= 720 hrs
Therefore, number of units of product S = 720/6
= 120 units

(c) Profit statement

Product Unit Production £ £

contribution quantities
P 32 60 1920
Q 36 100 3600
R 23 200 4600
S 30 120 3600
Total contribution 13,720
Less fixed overheads 1,720
Profit 12,000

Page 11 of 17
MODEL ANSWER TO QUESTION 4 CONTINUED

(d) Advice on overtime

Produce 30 units of product S in overtime hours
Additional unit labour cost of overtime = 25% x £24
= £6 per unit
Revised contribution per unit = £30 - £6
= £24 per unit
Total additional contribution = 30 x £24
= £720
Additional fixed costs = £500
Therefore, additional profit = £220

Advise the company to work overtime.

Page 12 of 17
QUESTION 5

A manufacturing company has prepared the following monthly overhead budget for its cost centre
B15.

Units produced 4,500 5,000 5,500 6,000

£ £ £ £
Indirect materials 22,500 24,500 26,950 29,400
Indirect labour 13,500 15,000 17,325 18,900
Power 2,360 2,560 2,760 2,960
Maintenance 13,200 14,500 15,800 17,100
Depreciation 6,440 6,440 6,440 6,440
Supervision 18,000 27,000 27,000 36,000

The variable indirect material cost per unit reduces by 2% for production of 5,000 units and over.

The variable indirect labour cost per unit increases by 5% for production of 5,500 units and over.

In Month 1 5,200 units were produced and actual overhead expenditure was:

£
Indirect materials 26,480
Indirect labour 15,100
Power 2,540
Maintenance 15,620
Depreciation 6,240
Supervision 27,800

REQUIRED

(a) Briefly explain the main difference between flexible and fixed budgets. (4 marks)

(b) Prepare a statement for Month 1 for cost centre B15, showing for each item of cost, the following:
Flexed budget allowance
Actual cost
Expenditure variance.
(16 marks)

(Total 20 marks)

Page 13 of 17
MODEL ANSWER TO QUESTION 5

(a) 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.

(b) Cost Centre Budget Statement Month 1

Production 5,200 units

Overhead costs Flexed Actual Variance

budget
£ £ £
Indirect material 25,480 26,480 1000A
Indirect labour 15,600 15,100 500F
Power 2,640 2,540 100F
Maintenance 15,020 15,620 600A
Depreciation 6,440 6,240 200F
Supervision 27,000 27,800 800A
92,180 93,780 1,600A

Workings:

Indirect material:
At the actual production output of 5,200 units (i.e. over 5,000 units) the 2% unit cost reduction will have
been received.

The budgeted costs for production outputs of 5,000, 5,500 and 6,000 units included in this reduction.

Budgeted output Unit cost

5,000 units 24,500/5,000 = £4.90
5,500 units 26,950/5,500 = £4.90
6,000 units 29,400/6,000 = £4.90

Unit costs the same, hence indirect material is a variable cost between these outputs. Therefore,
flexed budget at 5,200 units output = 5,200 x £4.90 = £25,480.

Indirect labour:
At the actual production output of 5,200 units (i.e. under 5,500 units), no increase in unit cost is
incurred.

The budgeted costs for production outputs of 4,500 and 5,000 units do not include the increase.

Budgeted output Unit cost

4,500 units 13,500/4,500 = £3.00
5,000 units 15,000/5,000 = £3.00

Unit costs the same, hence indirect labour is a variable cost between these outputs. Therefore, flexed
budget at 5,200 units output = 5,200 x £3.00 = 15,600.

Page 14 of 17
MODEL ANSWER TO QUESTION 5 CONTINUED

Workings continued:

Power:
Total overhead = Fixed o/h + (unit variable o/h x units)
(Using output units of 5,000 and 5,500)
2,760 = Fixed o/h + (uv o/h x 5,500)
2,560 = Fixed o/h + (uv o/h x 5,000)
200 = uv o/h x 500
Variable o/h = £0.40 per unit
Fixed o/h = 2,560 - 0.40 x 5,000
= £560
(Using output units of 5,500 and 6,000)
2,960 = Fixed o/h + (uv o/h x 6,000)
2,760 = Fixed o/h + (uv o/h x 5,500)
200 = uv o/h x 500
Variable o/h = £0.40 per unit
Fixed o/h = 2,560 - 0.40 x 5,000
= £560

Fixed and variable unit costs the same for each range of production outputs.
Therefore, flexed budget at 10,400 units = 560 + (5,200 x 0.40)
= £2,640

Maintenance:
Total overhead = Fixed o/h + (unit variable o/h x units)
(Using output units of 10,000 and 11,000)
15,800 = Fixed o/h + (uv o/h x 5,500)
14,500 = Fixed o/h + (uv o/h x 5,000)
1,300 = uv o/h x 500
Variable o/h = £2.60 per unit
Fixed o/h = 14,500 - 2.60 x 5,000
= £1,500
(Using output units of 5,500 and 6,000)
17,100 = Fixed o/h + (uv o/h x 6,000)
15,800 = Fixed o/h + (uv o/h x 5,500)
1,300 = uv o/h x 500
Variable o/h = £2.60 per unit
Fixed o/h = 14,500 - 2.60 x 5,000
= £1,500

Fixed and variable unit costs the same for each range of production outputs.
Therefore, flexed budget at 5,200 units = 1,500 + (5,200 x 2.60)
£15,020

Page 15 of 17
QUESTION 6

A manufacturing company operates a non-integrated accounting system. For the accounting year
ended 31 December Year 7 the statement which reconciles the profit shown in the Financial Accounts
with that shown in the Cost Accounts is as follows:

£ £
Profit as per financial accounts 54,000
Add:
Raw material closing stock difference 800
Work in progress opening stock difference 1,000
Finished goods closing stock difference 4,600
Under absorbed production overheads
carried forward in the Cost Accounts 1,500
7,900
61,900
Deduct:
Raw material opening stock difference 1,500
Work in progress closing stock difference 900
Finished goods opening stock difference 2,500
Dividends received 2,750
Rent received 8,000
15,650
Profit as per cost accounts 46,250

The Financial ledger included the following stock accounts for Year 7:

Raw Materials
1 Jan Balance b/f 17,500 Jan-Dec Return to suppliers 1,560
Jan-Dec Purchases 265,600 Jan-Dec Work in progress 215,200
31 Dec Balance c/f 66,340
283,100

Work in Progress
1 Jan Balance b/f 35,200 Jan-Dec Finished Goods 663,700
Jan-Dec Raw Materials 215,200 31 Dec Balance c/f 37,500
Jan-Dec Direct Wages 315,600
Jan-Dec Prod Overheads 135,200
701,200 701,200

Finished Goods
1 Jan Balance b/f 65,500 Jan-Dec Cost of Goods Sold 654,400
Jan-Dec Work in Progress 663,700 31 Dec Balance c/f 74,800
729,200 729,200

REQUIRED

(a) For the year ended 31 December Year 7 prepare the following Accounts, as they would appear in
the Cost Ledger:
(i) Raw Material Stock Control Account
(ii) Work in Progress Stock Control Account
(iii) Finished Goods Stock Control Account
(iv) Production Overhead Control Account. Balance in this account as at 1 Jan year 7 was nil.

(16 marks)

(b) Distinguish between integrated and non-integrated accounting systems. (4 marks)

(Total 20 marks)

Page 16 of 17
MODEL ANSWER TO QUESTION 6

(a) Year 7

(i)
£ £
Raw Material
1 Jan Balance b/f 19,000 Jan-Dec Returns to suppliers 1,560
Jan-Dec Purchases 265,600 Jan-Dec Work in progress 215,900
31 Dec Balance c/f 67,140
284,600 284,600

(ii)
Work in Progress
1 Jan Balance b/f 34,200 Jan-Dec Finished Goods 662,800
Jan-Dec Raw Materials 215,900 31 Dec Balance c/f 36,600
Jan-Dec Direct Wages 315,600
Jan-Dec Prod Overheads 133,700
699,400 699,400

(iii)
Finished Goods
1 Jan Balance b/f 68,000 Jan-Dec Cost of Goods Sold 651,400
Jan-Dec Work in Progress 662,800 31 Dec Balance c/f 79,400
730,800 730,800

(iv)
Production Overhead
Jan-Dec Cost ledger 135,200 Jan-Dec Work in Progress 133,700
31 Dec Balance c/f 1,500
135,200 135,200

(b) Integrated accounts – a set of accounting records which provides 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.

Page 17 of 17