Cost Accounting

Cost Accounting — 2023

KNEC Diploma in Supply Chain Management, Module II. Original theory examination questions with explained model answers for revision.

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March/April 2023

Paper codes: 2903/206; 2906/206; 2907/206; 2922/206
Time: 3 hours
Instructions: Answer any FIVE questions. All questions carry equal marks. Answer the questions in English.

Question 1(a) — 8 marks

Highlight four ways in which a cost accounting system enhances efficiency in an organization.

Model answer

1. Identifies the cost of products, services and activities for informed decisions.
2. Compares actual costs with budgets or standards to reveal waste.
3. Supports pricing, planning and economical resource allocation.
4. Assigns cost responsibility and provides information for corrective action.

Question 1(b) — 12 marks

Kemaks Limited uses material XP in its production. The following information relates to the material for the month of October 2022.

2022	Transaction
October 1	Balance b/f 76 metres valued Ksh 6,840
2	Received 170 metres at Ksh 100 per metre
4	Issued 110 metres
8	Received 50 metres at Ksh 98 per metre
14	Issued 80 metres
20	Issued 20 metres
27	Received 200 metres at Ksh 96 per metre
31	Issued 130 metres

Prepare a stores ledger account using the simple average method.

Model answer

Opening unit price = 6,840 ÷ 76 = Ksh 90. Average the quoted prices of the lots represented in stock before each issue, without weighting by quantities.

Closing stock: 156 units; ledger value Ksh 14,850. The simple average ignores quantities when averaging the prices of lots still represented in stock. FIFO quantity tracking is used only to identify exhausted lots. Therefore the closing ledger value need not equal the remaining physical quantity multiplied by the latest receipt price.

Question 2(a) — 8 marks

Explain each of the following types of costs:

(i) opportunity cost; (2 marks)

(ii) sunk cost; (2 marks)

(iii) differential cost; (2 marks)

(iv) joint cost. (2 marks)

Model answer

1. Opportunity cost: the benefit forgone by choosing one alternative instead of the next best alternative.
2. Sunk cost: a cost already incurred that cannot be changed by the present decision.
3. Differential cost: the difference in total cost between the alternatives being considered.
4. Joint cost: a common processing cost incurred before two or more joint products become separately identifiable.

Question 2(b) — 12 marks

Safi Limited manufactures sanitizers using chemical XT 20. The following information relates to the company for the year 2022.

Particulars	Information
Cost of placing an order	Ksh 120
Cost per litre	Ksh 150
Carrying cost per unit per annum	10% of purchase price
Usage per week	70–90 litres
Reorder period	3–7 weeks

Take 1 year = 52 weeks. Determine the:

(i) reorder level;

(ii) minimum stock level;

(iii) economic order quantity (EOQ)

(iv) maximum sock level;

(v) average stock level.

Model answer

Use approximately 258 litres per order. The average-stock calculation uses safety stock plus half the order quantity.

Question 3(a) — 9 marks

Mema Limited has two production departments P and Q and one service department X. The following overheads were incurred during the year 2022.

Particulars	Ksh
Indirect labour	1,522,000
Lighting	320,000
Depreciation of plant	480,000
Rent	1,200,000

Cost drivers

Driver	P	Q	X
Floor Area (m²)	50	20	30
Number of employees	14	4	2
Value of plant (Ksh. million)	10	9	5

Prepare an overhead analysis sheet

Model answer

The supplied scan awards 9 marks to this part; that mark is retained. No secondary-apportionment basis for service department X is supplied, so its cost remains separately identified.

Allocate each cost in the ratio of its relevant driver. Total employees = 20; floor area = 100 m²; plant value = Ksh 24 million.

Question 3(b) — 12 marks

Jambo Enterprises manufactures cleaning detergent which passes through two processes to completion. The following information relates to the processes:

Particulars	Process I Ksh	Process II Ksh
Direct materials introduced (2800) units	420,000	—
Direct wages	300,000	380,000

Additional information:

(i) Production overheads are absorbed at 75% of direct wages;

(ii) The outputs from process I and process II were 2600 units and 2392 units respectively.

(iii) A normal loss of 8% is expected in each process;

(iv) The scrap units are sold at Ksh 30 per unit.

Prepare

(i) Process I account;

(ii) Process II account.

Model answer

Process I overhead = 300,000 × 75% = 225,000; Process II overhead = 380,000 × 75% = 285,000. Retain full precision when transferring costs between processes.

Jambo — Process I

Jambo — Process II

Process I has an abnormal gain of 24 units. Process II output equals the expected 2,392 units, so it has no abnormal loss or gain.

Question 4(a) — 8 marks

Outline four advantages of piece rate method of remunerating employees.

Model answer

1. Directly links earnings to measurable output.
2. Encourages productive employees to increase output.
3. Simplifies determination of direct labour cost per unit.
4. Can reduce close time supervision when output and quality are properly checked.

Question 4(b) — 12 marks

Batutu Limited has received an offer of Ksh. 5,500,000 from a customer for Job No. 177 X. The following information relates to the job.

Particulars	Cutting	Stitching
Direct materials (Ksh)	250,000	160,000
Direct labour (Ksh)	1,500,000	1,000,000
Direct labour hours	12,000	25,000
Machine hours	10,000	18,000

The following estimates relate to the departments

Particulars	Cutting	Stitching
Factory overheads (Ksh)	4,500,000	6,400,000
Direct labour hours	90,000	80,000
Machine hours	20,000	160,000

Additional information:

Factory overheads in the cutting and stitching departments are absorbed on the basis of direct labour hours and machine hours respectively.

The firms mark up profit is 24%.

(i) Prepare a cost statement for Job 1777 X

(ii) Advise the management on whether to accept the offer or not.

Model answer

Accept the offer on the supplied cost and markup criterion: Ksh 5,500,000 exceeds the required Ksh 5,245,200 by Ksh 254,800. The printed reference changes from Job 177 X to Job 1777 X; the same supplied figures are used.

Question 5(a) — 8 marks

Highlight four features of batch costing.

Model answer

1. A batch of similar units is treated as the cost object.
2. Direct materials and labour are recorded for each batch.
3. Setup and overhead costs are charged or apportioned to the batch.
4. Unit cost is total batch cost divided by the number of good units in the batch.

Question 5(b) — 12 marks

Chemikal Limited was awarded a contract of Ksh. 20 million to build a hospital block. The following relates to the contract for the year ended 31 December 2022.

Particulars	Ksh
Plant at site (1 January 2022)	10,000,000
Plant at site (31 December 2022)	7,800,000
Material purchases	2,400,000
Material at site (31 December 2022)	1,100,000
Establishment charges	150,000
Subcontractor fee	450,000
Direct labour	1,300,000
Indirect labour	500,000
Value of work certified	8,000,000
Cost of work not yet done	1,500,000
Cash received	4,500,000

It is the policy of the firm to take a third of the notional profit to the income statement. Prepare a:

(i) contract account;

(ii) contractee account.

Model answer

Chemikal — Contract account (literal supplied wording)

Contractee account

Balance b/d: Ksh 3,500,000 Dr.

The printed Ksh 1,500,000 is described as “Cost of work not yet done”. Future unperformed work is not added as completed work-in-progress. If the intended phrase was “work done but not certified”, the alternative notional profit is 8,000,000 + 1,500,000 − 5,900,000 = Ksh 3,600,000; one-third transferred is Ksh 1,200,000 and the reserve is Ksh 2,400,000. The contractee balance remains Ksh 3,500,000.

Question 6(a) — 8 marks

Highlight four differences between cost accounting and financial accounting.

Model answer

Question 6(b) — 12 marks

Hanson Limited intends to acquire either machine FX 210 or FX 211. The following details relate to the machines:

Particulars	FX 210	FX 211
Initial cost Ksh	490,000	368,000
Security fee per annum Ksh	30,000	33,000
Maintenance cost per annum Ksh	170,000	180,000
Direct labour per annum Ksh	21,840	24,960
Power cost per day Ksh	280	300
Expected economic life in years	4	4
Salvage value Ksh	184,000	134,000

Take 1 year = 365 days

(i) Prepare operating costs statements for each machine.

(ii) Advise the management on the machine to purchase.

Model answer

Choose FX 210 on the supplied equal-life cost comparison: it saves Ksh 405,960 − 400,540 = Ksh 5,420 annually, or Ksh 21,680 over four years. This comparison assumes comparable service capacity and excludes discounting because no discount rate is supplied.

Question 7(a) — 8 marks

Explain each of the following terms as used in process costing:

(i) normal loss; (2 marks)

(ii) abnormal loss; (2 marks)

(iii) scrap value; (2 marks)

(iv) abnormal gain. (2 marks)

Model answer

1. Normal loss: the expected unavoidable reduction in input under efficient operating conditions.
2. Abnormal loss: actual loss above the expected normal allowance, costed separately for investigation.
3. Scrap value: the amount recoverable from selling rejected or lost material.
4. Abnormal gain: the improvement when actual loss is below the normal allowance, so good output exceeds expected output.

Question 7(b) — 12 marks

Abax Limited has three employees, Janet, Abdalla and Moris. The following information relates to the three employees for the month of June 2022.

Employee	Time rate per hour	Number of hours worked	Allowed output per hour (units)	Actual output units
Janet	100	38	70	2,520
Abdallah	95	41	60	2,700
Moris	90	42	68	2,720

Bonus is paid at half the normal rate. For each employee, determine:

(i) basic wage;

(ii) gross wage.

Model answer

Standard time = actual output ÷ allowed output per hour. Basic wage = actual hours × rate. Apply the stated half-rate bonus to positive time saved; no negative bonus is charged.

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June/July 2023

Paper codes: 2903/206; 2906/206; 2907/206; 2914/206; 2922/206; 2924/206; 2925/206
Time: 3 hours
Instructions: Answer any FIVE questions. Show all your workings. Answer the questions in English.

Question 1(a) — 8 marks

Explain four factors that should be considered when choosing a method of remunerating employees in an organization.

Model answer

1. Nature of work: measurable repetitive output may suit piece rates, while variable or team work may need time or group measures.
2. Quality and safety: rewards must not encourage unsafe speed or defective output.
3. Fairness and motivation: the method should provide understandable and equitable incentives.
4. Cost and administration: the organisation needs reliable measurement, affordable rewards and compliance with applicable employment requirements.

Question 1(b) — 12 marks

The following information relates to overheads incurred by Santah Limited for the year 2022.

Department	Ksh	Absorption base	Number of hours
X	300,000	Direct labour hours	2,500
Y	500,000	Direct labour hours	4,800
Z	100,000	Machine hours	1,200

Additional information:

The selling and distribution overheads are absorbed at 5% of production cost. The firm’s profit mark up is 20%. The firm has received an order for 500 units for Job No.155T, which is estimated to incur costs as follows:

Item	Information
Direct materials	Ksh 420,000
Direct labour — X	110 hours at Ksh 80 per hour
Direct labour — Y	60 hours at Ksh 70 per hour
Direct labour — Z	40 hours at Ksh 65 per hour
Machine time	50 machine hours at Ksh 100 per hour

The customer has offered to pay Ksh 600,000 for this job.

(i) Prepare a cost statement for Job No.155T.

(ii) Advise the management on whether to accept the order or not.

Model answer

Accept on the stated cost and markup basis: Ksh 600,000 exceeds the calculated Ksh 584,913 quotation. The explicit 50 machine hours at Ksh 100 is included as the supplied direct machine charge; departmental overhead is absorbed separately using the stated Z rate.

Question 2(a) — 8 marks

Explain four disadvantages of using Last in First Out (LIFO) method of stock valuation.

Model answer

1. Old inventory values: closing stock may contain outdated prices that give a poor indication of current values.
2. Complex records: several historic layers may need to be maintained.
3. Profit distortion: drawing down old low-cost layers can create misleading profit changes.
4. Weak physical-flow match: the method often differs from sensible stock rotation, especially for perishable goods.

Question 2(b) — 12 marks

Sarah and Meshack are employees of Salama Enterprises. The company pays its employees at a rate of Ksh.300 per hour. The following details relate to the last week of March 2023.

Employee	Hours worked
Sarah	40
Meshack	53

Additional information:

(i) The company allows employees to work for 48 hours per week.

(ii) Bonus is paid using the Rowan scheme.

(iii) Overtime is paid at a time and a half.

For each employee, determine the:

(i) Basic pay for the week.

(ii) Gross pay for the week.

Model answer

Using 48 hours as the allowed time: Rowan bonus = (time saved/allowed time) × actual time × hourly rate. Only positive savings earn a bonus.

Equivalently, Meshack receives normal-hours pay of 48 × 300 = Ksh 14,400 plus full overtime pay of 5 × 450 = Ksh 2,250. Do not add the full overtime payment to basic pay already covering all 53 hours.

Question 3(a) — 8 marks

Dirah Limited inteds to remove cotton soil from a plot measuring 50 by 100 feet. The information relates to the costs.

Item	Information
Lorry hire	Ksh 2,500 per load
Supervision fee	Ksh 2 per 10 square feet
Permit fee	Ksh 3,000
Expected lorries	22 fully loaded
Excavation cost	Ksh 33,000

The company has received an offer of excavating and disposing the cotton soil from the plot at a contract price of Ksh 80,000.

(i) Prepare an operation cost statement.

(ii) Advise the management on whether to accept the offer or not.

Model answer

If the offer is from an outside contractor to perform the complete work, accept on cost grounds: Ksh 80,000 saves Ksh 12,000, subject to equivalent scope and quality. If the sentence instead means a customer would pay Dirah Ksh 80,000 to do the work itself, reject that price because it would produce a Ksh 12,000 loss.

Question 3(b) — 12 marks

Twanze Limited produces a perfume that undergoes two processes to completion. The following information relates to the month of April 2023.

Particulars	Process I Ksh	Process II Ksh
Raw materials introduced (50,000 kg)	600,000	—
Added materials (268 kg)	—	2,680
Direct labour	180,000	20,000
Direct expenses	77,000	266,100

Additional information:

(i) Normal loss expected in process I and process II is 3% and 1% respectively.

(ii) Production overheads are absorbed on the basis of direct labour cost. Total production overheads for the month were Ksh 400,000.

(iii) Scrapped units are sold at Ksh 3 per unit.

(iv) The output from process I and process II was 47,732 units and 47,550 units respectively.

Prepare:

(i) Process I account.

(ii) Process II account.

Model answer

Twanze — Process I

Twanze — Process II

Process I abnormal loss = 768 units × Ksh 25 = Ksh 19,200. Process II abnormal gain = 30 units × Ksh 32 = Ksh 960. Process II loss is computed on 47,732 transferred units plus 268 introduced units = 48,000. The scan mixes “kg” and “units”; no conversion is provided, so quantities are treated as the same process unit.

Question 4(a) — 8 marks

Explain each of the following terms as used in process costing.

(i) Abnormal loss.

(ii) Abnormal gain.

(iii) Normal loss.

(iv) Scrap value.

Model answer

1. Abnormal loss: the loss above the normal allowance, isolated from the cost of efficient output.
2. Abnormal gain: the saving when actual loss is below the normal allowance.
3. Normal loss: expected unavoidable wastage under efficient process conditions.
4. Scrap value: proceeds recoverable from selling the rejected or lost material.

Question 4(b) — 12 marks

The following information relates to contract PX awarded to ABF limited for the year ended 31 December 2022.

Particulars	Ksh
Material purchases	810,000
Plant purchases	1,900,000
Sub-contractor’s fee	100,000
Direct wages	600,000
Value of work certified	1,850,000
Cost of work not certified	450,000
Electricity expenses	50,000

Additional information:

The contract price was Ksh 2,400,000. Depreciation on plant is charged at the rate of 25% per annum. Cash received during the year was Ksh 1,850,000. On 31 December 2022, unpaid wages amounted to Ksh 80,000.

Prepare:

(i) Contract account.

(ii) Contractee’s account.

(iii) Profit and loss account extract.

Model answer

ABF — Contract PX account

Contractee account

The profit transfer uses the usual examination notional-profit convention for a substantially progressed incomplete contract, adjusted for cash received. No estimated total completion cost is supplied for an estimated-profit method. Cash received equals certified work, so the cash ratio is 1.

Question 5(a) — 8 marks

Explain four limitations of Job order costing in a manufacturing firm.

Model answer

1. Detailed recording cost: separate job records require time and administration.
2. Allocation judgement: shared overheads may be charged using imperfect bases.
3. Delayed information: a complete job cost may only be known after substantial work is finished.
4. Limited comparability: customised jobs differ, making reliable standards and comparisons difficult.

Question 5(b) — 12 marks

Sema Limited has three production departments and two service departments. The following overheads were incurred during the year 2022.

Particulars	Ksh
Machining	1,600,000
Cutting	2,000,000
Stitching	800,000
Canteen	200,000
Maintenance	600,000

Additional information: The service department costs are apportioned to the production departments as follows:

Service	Machining	Cutting	Stitching	Canteen	Maintenance
Canteen	40%	20%	30%	—	10%
Maintenance	60%	10%	25%	5%	—

(i) Apportion the service department costs to the production departments using simultaneous equations.

(ii) Determine the total overheads for each production department.

Model answer

Let C and M be the full reciprocal costs of Canteen and Maintenance.

Question 6(a) — 8 marks

Explain four functions of a cost accountant in a manufacturing firm.

Model answer

1. Measure costs: collect and classify material, labour and overhead expenditure.
2. Plan and budget: prepare cost estimates, standards and resource budgets.
3. Control performance: analyse variances and report waste or inefficiency.
4. Support decisions: provide relevant cost information for pricing, make-or-buy and product decisions.

Question 6(b) — 12 marks

Fillah Limited had two production departments J and K and two service departments, L and M. The overheads incurred during the year 2022 is as follows:

Particulars	Ksh
Indirect labour	3,800,000
Lighting	360,000
Rent	1,200,000
Depreciation on machinery	750,000

Additional information:

Departmental data	J	K	L	M
Area occupied (m)	15	30	10	5
Value of machinery (Ksh)	3,000,000	2,000,000	1,000,000	1,500,000
Number of employees	20	11	4	3

Prepare an overhead apportionment sheet.

Model answer

Use employee numbers for indirect labour; floor area for lighting and rent; machinery values for depreciation. The driver totals are 38 employees, 60 area units and Ksh 7,500,000 machinery.

No basis is supplied for reallocating L and M to production, so this is the primary apportionment sheet.

Question 7(a) — 8 marks

Explain four characteristics of batch costing.

Model answer

1. A batch of similar units is treated as the cost object.
2. Direct materials and labour are recorded for each batch.
3. Setup and overhead costs are charged or apportioned to the batch.
4. Unit cost is total batch cost divided by the number of good units in the batch.

Question 7(b) — 8 marks

The following information relates to Ebbat enterprises for the year ended 31st December 2022.

Particulars	Ksh
Raw materials (1 January 2022)	40,000
Raw materials (31st December 2022)	50,000
Labour cost	1,260,000
Factory power	260,000
Plant at cost	4,000,000
Factory supervisor’s salary	150,000
Carriage on raw materials	110,000
Work in progress (1 January, 2022)	70,000
Work in progress (31 December 2022)	90,000
Materials returned to suppliers	35,000
Purchases of raw materials	720,000

Additional information:

(i) Depreciation on plant is at the rate of 5% per annum on cost.

(ii) A third of the labour cost is indirect cost.

(iii) The manufacturing profit is at 20%.

Prepare a cost statement.

Model answer

The usual manufacturing-profit markup on cost is used. If 20% were intended as a margin on transfer value instead, transfer value would be 2,635,000/0.8 = Ksh 3,293,750, with profit Ksh 658,750. The supplied 8-mark allocation is retained.