STRICTLY CONFIDENTIAL

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2007 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC9: COSTING AND BUDGETARY CONTROL

DECEMBER 2007 TIME ALLOWED : 3 HOURS

SUGGESTED SOLUTIONS
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1.(a)
Machine Machine
Total Shop A Shop B Assembly Canteen Maintenance
K K K K K K
Indirect wages 78,560 8,586 9,190 15,674 29,650 15,460 allocated
materials 16,900 6,400 8,700 1,200 600 - allocated
Rent and rates 16,700 3,711 4,453 5,567 2,227 742 area
Insurance 2,400 533 640 800 320 107 area
Power 8,600 4,730 3,440 258 - 172 usage
Heat and light 3,400 756 907 1,133 453 151 area
Depreciation 40,200 20,100 17,900 2,200 -__ -__ machine val
166,760 44,816 45,230 26,832 33,250 16,632
Reallocate - 7,600 5,890 19,760 (33,250) - direct labour
Reallocate -__ 4,752 11,880 -___ -___ (16,632) machine use
Totals 166,760 57,168 63,000 46,592 -___ -___

Indirect wages
Materials
Rent and rates
Insurance
Power
Heat and light
Depreciation
Total of overheads allocated and apportioned
Reallocation of canteen overheads
Reallocation of maintenance overheads
Totals of production department overheads
Total
(b) (i) Machine shop A K57,168 7,200 = K7.94 per machine hour
(ii) Machine shop B K63,000 18,000 = K3.50 per machine hour
(iii) Assembly K46,592 20,800 = K2.24 per direct labour hour

(c)
K K
Actual expenditure 176,533
Overhead absorbed:
Machine shop A 7,300 hrs x K7.94 57,962
Machine shop B 18,700 hrs x K3.50 65,450
Assembly 1,900 hrs x K2.24 49,056
172,468
Under-absorbed overhead 4,065
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2. (a) Unit cost using absorption costing

Mawanga Kuwala Zionere

K K K
Paint 15.20 11.18 18.90
Labour (W1) 2.65 3.98 6.63
Stirring and quality control (W2) 1.15 1.73 2.88
Electricity (W2) 5.00 7.50 12.50
Filling of machines 3.10 4.65 7.75
27.10 29.04 48.66

W1 - Labour cost per unit

Labour hours per unit Mawanga Kuwala Zionere
Rate per hour 0.50 0.75 1.25
Cost per unit K5.30 K5.30 K5.30
K2.65 K3.98 K6.63

W2 - Overheads – absorption costing

Mawanga Kuwala Zionere Total
Units 5,400 4,360 3,600 13,360
Labour hours per unit 0.5 0.75 1.25 -
Total labour hours 2,700 3,270 4,500 10,470

Total Total Rate

Overhead hours per hour
K K K
Paint stirring and quality control 24,081 10,470 2.30
Electricity 104,700 10,470 10.00
Filling of spraying machines 64,914 10,470 6.20

Mawanga Kuwala Zionere

K K K
Stirring @ K2.30 per hour (x 0.5/0.75/1.25) 1.15 1.73 2.88
Electricity @ K10 per hour 5.00 7.50 12.50
Filling @ K6.20 per hour 3.10 4.65 7.75

(b) Unit cost using activity based costing

Mawanga Kuwala Zionere

K K K
Paint 15.20 11.18 18.90
Labour 2.65 7.98 6.63
Stirring and quality control (W3) 1.38 1.27 3.08
Electricity (W3) 8.94 7.66 6.39
Filling of machines (W3) 4.87 5.52 4.04
33.04 29.61 39.04

W3 Overheads – activity based costing

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(i) Paint stirring and quality control

Mawanga Kuwala Zionere Total
Units 5,400 4,360 3,600
Batches 27 20 40 87
Share of overhead (27:20:40) K7,473 K5,536 K11,072 K24,081
Per unit K 1.38 K 1.27 K 3.08

(ii) Electricity
Mawanga Kuwala Zionere Total
Coats per unit 7 6 5
Total coats 37,800 26,160 18,000 81,960
Share of overhead K48,288 K33,418 22,994 K104,700
Per unit K 8.94 K 7.66 K 6.39

(iii) Filling
Mawanga Kuwala Zionere Total
Litres per unit 7.6 8.6 6.3
Total litres 41,040 37,496 22,680 101,216
Share of overhead K26,321 K24,048 K14,545 K64,914
Per unit K 4.87 K 5.52 K 4.04

(c) Cost drivers are activities or transactions that are significant determinants of cost,
in other words, the activities that cause costs to occur. Activity based costing
acknowledges that some costs vary not with the volume of output but with some
other activity.

This is clearly illustrated by the facts given in the question. If paint delivered is
stirred and inspected in batches, then it is the number of batches rather than units
or labour hours that determine how much stirring and inspection is to be done.

The use of electricity best illustrates the difference between the two methods in
this example. Under absorption costing, Zionere Ltd’s products absorb the largest
part of the electricity overhead because Zionere Ltd’s involve more labour time
than the other products. Under activity based costing, Zionere Ltd’s products have
the smallest share of the electricity overhead, recognising that the use of labour
time and consumption of electricity are not necessarily related. (Note that Zionere
Ltd’s products use more different batches of paint than the other products: the
labour time is probably spent adjusting the machinery while it is idle rather than
operating it and using electricity.)

The consequences of adopting activity based costing are a significant change in

the unit cost of Zionere Ltd’s products mainly at the expense of Mawanga Ltd’s.
This will have implications for valuing work-in-progress and also for pricing the
service and assessing its overall validity.
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3. (a) (i) Equivalent units

Units Moulding Direct Direct Production
department materials labour Overhead
% EU % EU % EU % EU
Finished goods: Open WIP 2,000 100 2,000 100 2,000 100 2,000 100 2,000
Worked units 6,000 100 6,000 100 6,000 100 6,000 100 6,000
Work-in-progress 4,000 100 4,000 90 3,600 70 2,800 35 1,400
12,000 12,000 11,600 10,800 9,400

(ii) Cost per equivalent unit

Moulding Direct Direct Production
department materials labour Credit
overhead
K K K K
Cost brought forward 32,000 20,000 7,200 5,500
Cost incurred 160,000 96,000 36,000 18,000
Total 192,000 116,000 43,200 23,500

Equivalent units 12,000 11,600 10,800 9,400

Cost per equivalent 16 10 4 2.5

(b) (i) Statement of evaluation

Finished goods 8,000 x K32.50 260,000

Or

K
Moulding 8,000 x K16 128,000
Direct materials 8,000 x K10 80,000
Direct labour 8,000 x K4 32,000
Production overhead 8,000 x K2.5 20,000
260,000
Closing WIP
Moulding 4,000 x K16 64,000
Direct materials 3,600 x K10 36,000
Direct labour 2,800 x K4 11,200
Production overhead 1,400 x K2.50 3,500
114,700

(ii) Assembly department account

Debit Credit
Units K Units K
Open WIP 2,000 64,700 Finished goods 8,000 260,000
Moulding dept 10,000 160,000 WIP 4,000 114,700
Direct material 96,000
Direct labour 36,000
Production overhead _____ 18,000 _____ ______
12,000 374,700 12,000 374,700
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4. (a) Material purchases

January February March

K K K
Closing stock 35,000 60,000 40,000
Add material usage 80,000 90,000 100,000
Material required 115,000 150,000 140,000
Less opening stock 50,000 35,000 60,000
Material purchases 65,000 115,000 80,000

(b) Cash Budget for 1 Quarter of 2008

January February March

K K K
Receipts
Sales – cash 10% 45,000 50,000 60,000
- credit 90% 295,000 405,000 450,000
340,000 455,000 510,000

January February March

K K K
Payments
Wages 120,000 130,000 145,000
Overheads (excl depreciation) 65,000 70,000 80,000
Materials 65,000 115,000 80,000
Taxation ______ 250,000 ______
250,000 565,000 305,000

Surplus/(deficit)
Opening balance 90,000 (110,000) 205,000
Closing balance 117,500 207,500 97,500
207,500 97,500 302,500

(c) Advantages of preparing budgets

(i) It assists in planning future cash requirements by taking action in

advance where cash deficits are forecast.
(ii) Investment decisions can be made where there is a forecast cash
surplus whether short-term or long-term.
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5. (a) Let budgeted output = q

Fixed production overhead expenditure variance = budgeted

overhead – actual overhead
= K (84q – 200,000) = K14,192 A
84q – 200,000 = -14,192
84q = -14,192 + 200,000
84q = 185,808
q = 185,808 84
q = 2,212 units

(b) K
Total direct wages cost 171,320
Adjust for variances:
Labour rate (10,598)
Labour efficiency 8,478
Standard direct wages cost 169,200

Actual output = total standard cost  unit standard cost

= K169,200  K72
= 2,350 units

(c) K
Total direct wages cost 171,320.00
less rate variance (10,598.00)
standard rate for actual hours 160,722.00
 Standard rate per hour  K12.00
actual hours worked 13,393.5 hours

(d) Average actual wages rate per hour = actual wages  actual hours
= K171,320  13,393.5
= K12.79 per hour

(e) Number of kilogrammes purchased and used = x

K
x kilogrammes should have cost x K6 6.0x
But did cost x K5.50 5.5x
Direct material price variance 0.5x

K0.5x = K18,840
x = 18,840  0.5
x = 37,680
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6. (a) (i) An opportunity cost is a cost that measures the opportunity that
is lost or sacrificed when the choice of one course of action
requires that an alternative course of action be given up.
Opportunity costs only apply to the use of scarce resources.

(ii) A differential cost is a cost for decision-making that will differ

between the various alternatives being considered. These costs
depend on the decision taken.

(iii) A sunk cost is a cost of a resource already acquired and will not
be affected by the choice between various alternatives. Sunk
costs are differentiated from irrelevant costs, as not all
irrelevant costs are sunk costs.

(b)
K K
Sales 750,000
Differential costs:
Programmer salary 600,000
Equipment hire 84,000
Supplies 27,000
Other costs 38,000
749,000
Contribution 1,000

The contract earns a positive contribution of K1,000 and would

therefore be acceptable.

(c) (i) The likelihood of a more profitable proposal being received.

(ii) Whether repeat orders would be expected at the same price in
future.
(iii) Whether the company will lose its present customers because
of the special order price.

7. (a) (i) Continuous stocktaking refers to the

physical counting of
stock items on a regular basis so as to ensure that stock
records are in agreement with the actual physical stock held.

(ii) The perpetual inventory system is a stock recoding system

whereby the stock balance is shown on the record after
every stock movement, either the issue or receipt of stock.

(b) Advantages of continuous stocktaking:

1. It avoids the disruption caused by the annual stock take.

2. Regular checking will produce more accurate stock figures.

3. Discrepancies, losses and deterioration will be discovered
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earlier.
4. Stock figures for interim financial statements will be
readily available.
5. The continuous presence of independent stock checkers
may reduce pilferage and losses.
6. The continuous performance of stock takes may result in
result in staff gaining experience more quickly than from
the annual stock takes.

(c) (i) Idle time is the time lost during the production process for
which an organisation pays its employees. Idle time cost
may be charged as an indirect production cost to all jobs.

(ii) Causes of idle time

1. temporary lack of work

2. machine breakdowns
3. material shortages
4. poor production scheduling.

(d) (i) Predetermined overhead absorption rates are overhead

absorption rates calculated at the beginning of an
accounting period using estimated or budgeted figures for
overheads and units of the chosen absorption basis.
Predetermined overhead absorption rates are used so as to
avoid delays that would result if actual overhead absorption
rates were to be used or the fluctuations that would result.

(ii) Advantage of blanket overhead absorption rates:

1. They are simple to calculate.

Disadvantages of blanket overhead absorption rates:

1. They do not reflect the different characteristics and

time spent in the various departments.
2. Some products will be under charged or
overcharged with overheads.

END