LCCI International Qualifications

Cost Accounting
Level 3

Model Answers
Series 3 2009 (3017)

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Cost Accounting Level 3
Series 3 2009

How to use this booklet

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
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 2009

All rights reserved; no part of this publication may be reproduced, stored in a retrieval system or
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Page 1 of 17
QUESTION 1

A company uses three different raw materials (RM1, RM2 & RM3) which it obtains from an outside
supplier. The following information is provided relating to each raw material:

Raw Material RM1

Balance in stores is currently 250 kg

Stock on order 1000 kg
Allocated stock is 350 kg

Raw Material RM2

Daily usage varies between 240 and 360 kg

Lead time for delivery varies between 15 and 21 days.
Order quantity is 10,000 kg

Raw Material RM3

Order quantity 1,000 kg

Purchase price £2.00 per kg
Monthly usage 1,500 kg
Safety (buffer) stock 1,000 kg
Ordering costs £250 per order
Stock holding costs are 20% of the average stockholding per annum.
The supplier has offered a discount off the purchase price if the order quantity is increased. Details are
as follows:

Order Quantity Discount

1,000 kg -
1,500 kg 5%
3,000 kg 7.5%

REQUIRED

(a) For raw material RM1 calculate the free stock currently available.
(2 marks)

(b) For raw material RM2 calculate:

(i) the reorder level

(ii) the minimum and maximum stock control levels.
(6 marks)

(c) For raw material RM3 determine the order quantity that would minimise the total annual costs.

(8 marks)

(d) Briefly explain the meaning of:

(i) Re-order level

(ii) Allocated stock
(iii) Free stock.
(4 marks)

(Total 20 marks)

3017/3/09/MA Page 2 of 17
MODEL ANSWER TO QUESTION 1

(a) Raw material RM1

Free stock = Stock balance in stores + Stock on order - Allocated stock
Free stock = 250kg + 1000kg - 350kg = 900kg

(b) Raw material RM2

(i) Reorder level
= maximum usage x maximum lead time
= 360 x 21 = 7,560kg

(ii) Minimum stock control level

= Re-order level - (average use x average lead time)
= 7,560 - (300 x 18) = 2,160kg

Maximum stock control level

= Re-order level - (minimum use x minimum lead time) + re-order quantity
= 7,560 - (240 x 15) + 10,000 = 13,960kg

(c) Raw material RM3

Quantity to minimise annual costs

Order quantity(kg) 1,000 1,500 3,000

Usage per year(kg) 18,000 18,000 18,000
Number of orders per year 18 12 6
Average stock [W1] 1,500 1,750 2,500
Material cost per kg(£) 2.00 1.90 1.85

Ordering costs(£) 4,500 3,000 1,500

Stock holding costs(£) 600 665 925
Total material cost 36,000 34,200 33,300
41,100 37,865 35,725

Order 3,000 kg, at a discount price of £1.85 per kg, six times per year

[W1] Average stock = ½ order quantity + safety stock

3017/3/09/MA Page 3 of 17
MODEL ANSWER TO QUESTION 1 CONTINUED

(d) (i) Re-order level

The stock level at which the business re-orders more stock.

(ii) Allocated stock

Stock that has been scheduled for use.

(iii) Free stock

Stock that is available for reservation or allocation, (or immediate issue from stock,
without prior reservation, provided there is physical stock in stores).

3017/3/09/MA Page 4 of 17
QUESTION 2

Triple Products Ltd manufactures three products Hay, Bee and Cee. At present the company uses a
traditional absorption costing system to establish the costs of production. Budgeted production data for
the next period is as follows:

Hay Bee Cee

Production output (units) 1,000 800 400
Material per unit at £5 per kg 5kg 10kg 7.5kg
Labour per unit at £9 hour 2hrs 2hrs 3hrs
Machine time per unit 2hrs 1.5hrs 2hrs

Variable production overheads are budgeted to be absorbed at £3.50 per labour hour.
Fixed production overheads for the period are budgeted to be £66,000, absorbed on a machine hour
basis.

The company is considering the introduction of an activity based costing system.

Further investigation has revealed the following activities and related overhead costs:

Activities Costs (£)

Product inspection 24,000
Machine set-up 16,000
Machine maintenance 12,000
Packing and despatch 6,000
Material handling 8,000
66,000

Other information:

1 Budgeted orders for next period: Hay 10 orders; Bee and Cee 5 orders each. Each order is
expected to require one machine set up and two inspections.

2 Machine maintenance is carried out regularly based on a predetermined number of machine

running hours.

3 Each product is packed and despatched in crates containing the following number of products per
crate: Hay 50 units, Bee 25 units and Cee 50 units. The number of crates used influences product
despatch costs.

4 Material handling costs are influenced by the quantity of material used.

REQUIRED

(a) Calculate the production cost of one unit of each product using:

(i) Traditional absorption costing

(ii) Activity based costing.
(16 marks)

(b) Explain the meaning of the term cost driver. Your explanation should include two examples to
illustrate your answer.
(4 marks)

(Total 20 marks)

3017/3/09/MA Page 5 of 17
MODEL ANSWER TO QUESTION 2

(a) Hay Bee Cee Total

Output(units) 1,000 800 400
Machine time per unit 2 hrs 1.5 hrs 2 hrs
Total machine hrs 2,000 1,200 800 4,000

Fixed overhead for period(£) 66,000

Overhead absorption rate = £66,000 / 4,000 = £16.5 per machine hour
Production cost (Traditional absorption costing)
(i) Hay Bee Cee
£ £ £
Material 25 (5 x £5) 50 (10 x £5) 37.5 (7.5 x £5)
Labour 18 (2 x £9) 18 (2 x £9) 27 (3 x £9)
Variable overheads 7 (2 x £3.50) 7 (2 x £3.50) 10.5 (3 x £3.50)
Fixed overheads 33 (2 x £16.50) 24.75 (1.50 x £16.50) 33 (2 x £16.50)
Total unit cost 83 99.75 108

Activity Based Costing

(ii) Hay Bee Cee
Overhead
Product inspection
No of inspections 20 (10 x 2) 10 (5 x 2) 10 (5 x 2)
Total cost (£'000) 12 (24 x 20/40) 6 (24 x 10/40) 6 (24 x 10/40)
Cost per unit (£) 12 (12,000/1,000) 7.5 (6,000/800) 15 (6,000/400)
Machine set-up
No of machine set-ups 10 (10 x 1) 5 (5 x 1) 5 (5 x 1)
Total cost (£'000) 8 (16 x 10/20) 4 (16 x 5/20) 4 (16 x 5/20)
Cost per unit (£) 8 (8,000/1,000) 5 (4,000/800) 10 (4,000/400)
Machine maintenance
No of machine hours 2,000 (1,000 x 2) 1,200 (800 x 1.50) 800 (400 x 2)
Total cost (£'000) 6 (12 x 2,000/4,000) 3.6 (12 x 1,200/4,000) 2.4 (12 x 800/4,000)
Cost per unit (£) 6 (6,000/1,000) 4.5 (3,600/800) 6 (2,400/400)
Packing & despatch
No of crates 20 (1,000/50) 32 (800/25) 8 (400/50)
Total cost (£'000) 2 (6 x 20/60) 3.2 (6 x 32/60) 0.8 (6 x 8/60)
Cost per unit (£) 2 (2,000/1,000) 4 (3,200/800) 2 (800/400)
Material handling
Quantity of material (kg) 5,000 (1,000 x 5) 8,000 (800 x 10) 3,000 (400 x 7.5)
Total cost (£'000) 2.5 (8 x 5,000/16,000) 4 (8 x 8,000/16,000) 1.5 (8 x 3,000/16,000)
Cost per unit (£) 2.5 (2,500/1,000) 5 (4,000/800) 3.75 (1,500/400)

3017/3/09/MA Page 6 of 17
MODEL ANSWER TO QUESTION 2 CONTINUED

Overhead cost per unit

Hay Bee Cee
£ £ £
Product inspection 12 7.5 15
Machine set-up 8 5 10
Machine maintenance 6 4.5 6
Product despatch 2 4 2
Material handling 2.5 511 3.75
Cost per unit 30.5 26 36.75

Production cost (Activity based costing)

Hay Bee Cee
£ £ £
Material 25 50 37.5
Labour 18 18 27
Variable overheads 7 7 10.5
Fixed overheads 30.5 26 36.75
Total unit cost 80.5 101 111.75

Cost drivers
(b) A cost driver is any factor which causes a change in the cost of an activity.

Examples:
Number of inspections
Number of machine set-ups
Number of machine hours
Number of boxes
Weight of material moved

3017/3/09/MA Page 7 of 17
QUESTION 3

James is planning to start a new business, commencing January year 10, by investing £10,000 of his
own capital and obtaining a bank loan of £20,000. His bank manager has asked him to prepare a cash
budget as part of his business plan.

James has used a market research survey to evaluate probable sales and has produced the following
budgeted data:

All sales will be made at £15 per unit. James anticipates 20% cash sales with remaining customers
being allowed one month credit. Sales units are estimated to be as follows:

January 0 July 2,500

February 1,800 August 2,700
March 2,000 September 2,800
April 2,000 October 2,500
May 2,200 November 2,200
June 2,400 December 2,000
January (year 11) 2,200

It is estimated that 2% of credit sales will be bad debts.

James has also provided the following information:

All units will be produced in the month before they are required for sale.

Material used for production will be purchased in the month they are used at a cost of £8 per unit.
James anticipates his first four months’ purchases will be for cash with the supplier allowing one
months credit on purchases thereafter.

Direct labour will be paid at a rate of £4 per unit of finished product payable in the month of production.
A bonus payment of £1 per unit will be paid for all additional monthly production in excess of 2,000
units. This bonus will be paid in the month following the production.

Overheads will amount to £4,000 per month and are paid in the month in which they are incurred.

Equipment costing £20,000 will be purchased and paid for in January using the bank loan of £20,000.
The loan will be repaid over 4 years with an annual interest charge of £1,000. Repayments will be
made on a quarterly basis in equal instalments commencing in March. The equipment will be
depreciated over the term of the loan. The depreciation charge has been included in the overheads.

REQUIRED

(a) Prepare the cash budget, in tabular format, for submission to the bank for each of the following
three month periods:

January to March
April to June
July to September
October to December.
(16 marks)

(b) State two advantages of having a cash budget.

(4 marks)

(Total 20 marks)

3017/3/09/MA Page 8 of 17
MODEL ANSWER TO QUESTION 3

Workings
Receipts:
Sales Revenue Cash Credit Receipts Receipts per
units (£) (20%) (80% x 0.98) per month 3 month period
Jan 0 0 0 0
Feb 1,800 27,000 5,400 0 5,400
Mar 2,000 30,000 6,000 21,168 27,168 32,568
Apr 2,000 30,000 6,000 23,520 29,520
May 2,200 33,000 6,600 23,520 30,120
Jun 2,400 36,000 7,200 25,872 33,072 92,712
Jul 2,500 37,500 7,500 28,224 35,724
Aug 2,700 40,500 8,100 29,400 37,500
Sep 2,800 42,000 8,400 31,752 40,152 113,376
Oct 2,500 37,500 7,500 32,928 40,428
Nov 2,200 33,000 6,600 29,400 36,000
Dec 2,000 30,000 6,000 25,872 31,872 108,300

Payments:
Material
Sales Production Purchases Cash Credit Payment(£) Payments(£) per
units units £ £ £ per month 3 month period
Jan 0 1,800 14,400 14,400 0 14,400
Feb 1,800 2,000 16,000 16,000 0 16,000
Mar 2,000 2,000 16,000 16,000 0 16,000 46,400
Apr 2,000 2,200 17,600 17,600 0 17,600
May 2,200 2,400 19,200 0 0 0
Jun 2,400 2,500 20,000 0 19,200 19,200 36,800
Jul 2,500 2,700 21,600 0 20,000 20,000
Aug 2,700 2,800 22,400 0 21,600 21,600
Sep 2,800 2,500 20,000 0 22,400 22,400 64,000
Oct 2,500 2,200 17,600 0 20,000 20,000
Nov 2,200 2,000 16,000 0 17,600 17,600
Dec 2,000 2,200 17,600 0 16,000 16,000 53,600

3017/3/09/MA Page 9 of 17
MODEL ANSWER TO QUESTION 3 CONTINUED

Labour
Production Bonus Basic rate Bonus Payment(£) Payments(£) per
units units cost(£) payment(£) per month 3 month period
Jan 1,800 0 7,200 0 7,200
Feb 2,000 0 8,000 0 8,000
Mar 2,000 0 8,000 0 8,000 23,200
Apr 2,200 200 8,800 0 8,800
May 2,400 400 9,600 200 9,800
Jun 2,500 500 10,000 400 10,400 29,000
Jul 2,700 700 10,800 500 11,300
Aug 2,800 800 11,200 700 11,900
Sep 2,500 500 10,000 800 10,800 34,000
Oct 2,200 200 8,800 500 9,300
Nov 2,000 0 8,000 200 8,200
Dec 2,200 200 8,800 0 8,800 26,300
Depreciation
£20,000 / 4 = £5,000 per year, = 5,000 / 4 = £1,250 per quarter
Overheads = £4,000 x 3 - £1,250 = £10,750 per quarter
Bank loan
Repayment = £20,000 / 4 + £1,000 = £6,000 per year
= £6,000 / 4 = £1,500 per quarter

Cash budget
(a) Jan-March April-June July-Sept Oct-Dec
Receipts £ £ £ £
Bank loan 20,000
Sales 32,568 92,712 113,376 108,300
52,568 92,712 113,376 108,300
Payments £ £ £ £
Equipment 20,000
Material 46,400 36,800 64,000 53,600
Labour 23,200 29,000 34,000 26,300
Overheads 10,750 10,750 10,750 10,750
Bank loan 1,500 1,500 1,500 1,500
101,850 78,050 110,250 92,150

Net cash flow -49,282 14,662 3,126 16,150

Opening balance 10,000 -39,282 -24,620 -21,494
Closing balance -39,282 -24,620 -21,494 -5,344

3017/3/09/MA Page 10 of 17
MODEL ANSWER TO QUESTION 3 CONTINUED

(b) (i) Cash shortages revealed early and arrangements can be made for overdraft on best terms.

(ii) Cash surpluses revealed and can be invested.

3017/3/09/MA Page 11 of 17
QUESTION 4

A company which manufactures and sells four products (A,B,C and D), has presented the following
budget details for year 10.
A B C D
Sales (units per year) 2,500 2,000 1,000 600
Selling price (per unit) £10 £12 £16 £25
Variable cost (per unit) £6 £6 £10 £16
Fixed costs £16,700 for the year.

REQUIRED

(a) Calculate the contribution to sales ratio (to the nearest £) for each product and for the company
overall.
(5 marks)

(b) Calculate the budgeted profit for year 10.

(2 marks)

(c) Calculate the break-even revenue based on the budgeted sales mix.
(3 marks)

(d) Draw a contribution break-even chart for the budgeted sales mix. Indicate clearly on the chart the
break-even revenue, the margin of safety and the contribution area.
(8 marks)

(e) Calculate the sales revenue required (to the nearest £ hundred), based on the budgeted sales
mix, to achieve a net profit of £20,000.
(2 marks)

(Total 20 marks)

3017/3/09/MA Page 12 of 17
MODEL ANSWER TO QUESTION 4

(a) Contribution to sales ratio

Product A 40% [(10 - 6) / 10 x100%]
Product B 50% [(12 - 6) /12 x 100%]
Product C 37.50% [(16 - 10) / 16 x100%]
Product D 36% [(25 - 16) / 25x 100%]

Overall 41.75%
Workings:
Total sales(£) = (10 x 2,500) + (12 x 2,000) + (16 x 1,000) + (25 x 600)
= £80,000
Total contribution(£) = (4 x 2,500) + (6 x 2,000) + (6 x 1,000) + (9 x 600)
= £33,400
Overall contribution to sales ratio
= 33,400 / 80,000
= 41.75%

(b) Budgeted profit

£
Contribution 33,400
Fixed costs 16,700
Profit 16,700

(c) Break-even revenue(£)

Fixed cost 16,700
Overall contribution ratio 0.4175
Break-even revenue 16,700 / 0.4175
= £40,000

(d) Contribution break-even chart

Heading Margin of safety
Labels Contribution area
Break-even revenue Lines

(e) Sales revenue(£)

Fixed cost 16,700
Required profit 20,000
Overall contribution ratio 0.4175
Sales revenue(£) (16,700 + 20,000) / 0.4175
= 87,904
= £87,900 (to nearest £100)

3017/3/09/MA Page 13 of 17
QUESTION 4 CONTINUED

3017/3/09/MA Page 14 of 17
QUESTION 5

Sole Products Ltd, which uses a standard costing system, produces a monthly reconciliation
statement showing the variances between standard production costs and actual production costs.
The following is the statement for May year 9.
£ £
Standard cost of production 44,200
Variances:
Material price 100 Adv
Material usage 600 Fav
Labour rate 250 Adv
Labour efficiency 1,000 Fav
Idle time (machine breakdown) 500 Adv
Fixed overhead expenditure 1,500 Adv
Fixed overhead volume 1,200 Fav
450 Fav
Actual cost of production 43,750

Actual production for the month 650 units

The standard direct costs for one unit of production are:

Direct material 4kg at £6 per kg
Direct labour 2 hours at £10 per hour.

Fixed overheads are absorbed at a rate of £12 per direct labour hour.

REQUIRED

(a) Calculate for the month:

(i) The actual quantity of direct materials used and the total actual direct material cost
(assume usage quantity equals purchased quantity)
(ii) The actual labour hours worked, the idle time due to machine breakdown and the total
direct labour cost
(iii) The actual fixed production overhead incurred
(iv) The budgeted production units.
(16 marks)

(b) Describe the possible reasons for the variances on:

(i) Direct material

(ii) Direct labour.
(4 marks)

(Total 20 marks)

3017/3/09/MA Page 15 of 17
MODEL ANSWER TO QUESTION 5

(a)
(i) Material usage variance = Std price (std usage for actual prod - actual usage)
600F = 6 (650 x 4 - actual usage)
Actual usage = (650 x 4) - 100
Actual usage = 2,500kg
Material price variance = Actual usage (std price - actual price)
Material price variance = (Actual usage x std price) - actual cost
100A = (2,500 x 6) - actual cost
Actual cost = (2,500 x 6) + 100
Actual cost = £15,100

(ii) Labour efficiency variance = Std rate (std hours - actual hours worked)
1,000F = 10 (650 x 2 - actual hours worked)
Actual hours worked = (650 x 2) - 100
Actual hours worked = 1,200 hours (does not include idle time hours)

Idle time variance = std rate x idle time hours

500A = 10 x idle time hours
Idle time hours = 500 / 10
Idle time hours = 50 hours

Labour rate variance = (Actual hours + idle time hours) x (std rate - actual rate)
Labour rate variance = [(Actual hours + idle time) x std rate] - actual direct labour cost
250A = [(1,200 + 50) x 10] - actual direct labour cost
Actual direct labour cost = 12,500 + 250
Actual direct labour cost = £12,750

(iii) Fixed o/h volume variance = Std rate x std hours - budgeted o/h
1,200F = 12 x (650 x 2) - budgeted o/h
Budgeted overhead = 15,600 - 1,200
Budgeted overhead = £14,400
Fixed o/h expenditure variance = Budgeted o/h - Actual o/h
1,500A = 14,400 - actual o/h
Actual fixed production o/h = 14,400 + 1,500
Actual fixed production o/h = £15,900

(iv) Budgeted production (units) = Budgeted o/h / Fixed o/h absorption rate per unit
Budgeted production (units) = 14,400 / (12 x2)
Budgeted production (units) = 600 units

3017/3/09/MA Page 16 of 17
QUESTION 5 CONTINUED

(b) (i) Direct material variance

The company could have found a new supplier who offered a better quality material at a
higher unit price per kg (adverse price variance) and as a consequence less material than
standard could have been used (favourable usage variance).

(ii) Direct labour variance

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 production time that was quicker
than the standard time (favourable efficiency variance).

3017/3/09/MA Page 17 of 17
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Tel. +44 (0) 8707 202909

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