Cost Accounting

Cost Accounting — 2022

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

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November 2022

Paper codes: 2903/206
Time: Not shown in supplied scan
Instructions: Not shown in supplied scan

Question 1(a) — 8 marks

Explain four duties 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 1(b) — 12 marks

Katana Limited uses material M50 in its production process. The following information relates to the material for the month of June 2022.

Date in June 2022	Transaction
1	Purchased/received 2,000 units at Ksh 100 per unit
9	Purchased/received 520 units at Ksh 105 per unit
10	Issued 1,400 units
12	Purchased/received 800 units at Ksh 115 per unit
14	Purchased/received 600 units at Ksh 125 per unit
16	Issued 1,240 units
20	Issued 480 units
25	Purchased/received 1,000 units at Ksh 110 per unit
30	Issued 760 units

Prepare a stores ledger account using the weighted average cost method of stock valuation.

Model answer

After each receipt: weighted average rate = total stock value ÷ stock quantity. Issues use the current average rate.

Rates are retained at full precision in the workings. Check: 531,600 − 416,657.89 = closing stock Ksh 114,942.11.

Question 2(a) — 8 marks

Differentiate between each of the following type of costs:

(i) Fixed costs and variable costs;

(ii) Product costs and period costs;

(iii) Relevant costs and irrelevant costs;

(iv) Controllable costs and non-controllable costs.

Model answer

Question 2(b) — 12 marks

Mara Transport Company operates a fleet of six buses between two towns, 75 kilometres apart. The seating capacity of each bus is 40 passengers. The following information relates to the company for the month of April 2022.

Particulars	Ksh
Salaries to drivers	36,000
Salaries to office staff	15,000
Diesel and oils	103,200
Repairs and maintenance	12,000
Insurance	24,000
Depreciation	39,000
Interest on loan	30,000

Additional information:

(i) Actual passengers carried were 80% of the seating capacity.

(ii) All the buses operated on all days of the month.

(iii) Each bus made one round trip per day.

(i) Prepare an operating cost statement showing: (I) total fixed costs; (II) total variable costs; (III) total costs; (IV) cost per passenger-kilometre.

(ii) Determine the bus fare to be charged per passenger in order to make a profit of Ksh 201,600 in a month.

Model answer

Charge Ksh 40 for a one-way journey (Ksh 80 for a return journey). Driver salaries and the other standing costs are treated as fixed; repairs and fuel vary with bus operation.

Question 3(a) — 10 marks

Rex Limited has three production departments R₁, R₂ and R₃ and two service departments, S₁ and S₂. The following are the overheads for each department.

Particulars	Ksh
R₁	80,000
R₂	100,000
R₃	120,000
S₁	39,904
S₂	20,000

Overheads of the service departments are apportioned as follows:

From	R₁	R₂	R₃	S₁	S₂
S₁	40%	30%	20%	—	10%
S₂	20%	40%	20%	20%	—

(i) Using the simultaneous equation method, reapportion the service department overheads to the production departments.

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

Model answer

Let x and y be the full reciprocal costs of S₁ and S₂. Then x = 39,904 + 0.20y; y = 20,000 + 0.10x. Substitute: x = 43,904 + 0.02x, so 0.98x = 43,904; x = 44,800 and y = 24,480.

Check: 102,816 + 123,232 + 133,856 = Ksh 359,904, equal to the original total.

Question 3(b) — 10 marks

Daky Limited manufactures Product Q that passes through Process 1 and Process 2. The output of process 2 is transferred to finished goods account. At the beginning of the month of May 2022, 6,000 units were transferred from Process 1 to Process 2. During the month, the following costs were incurred.

Particulars	Ksh
Materials	6,810,000
Additional materials	2,203,200
Labour	480,240
Overheads	528,000

During the month, 4,800 units were transferred to the finished goods account. At the end of the month, closing work in progress was 1,200 units at the following stages of completion.

Element	Completion
Materials	100%
Additional materials	50%
Labour	60%
Overheads	40%

(i) Prepare a statement of total equivalents units.

(ii) Determine the: (I) cost per unit; (II) value of work in progress.

Model answer

No opening work in progress or losses are stated. Equivalent units = completed output + closing WIP × percentage completion.

Check: 8,304,000 + 1,717,440 equals the four input costs, Ksh 10,021,440.

Question 4(a) — 8 marks

Explain four measures that a firm may take to prevent fraud in the payroll.

Model answer

1. Segregate duties: different officers authorise employment, maintain payroll, approve attendance and release pay, reducing an individual’s ability to create and pay ghost workers.
2. Verify employees and attendance independently using approved personnel records, identification and time records, so payment is made only for genuine service.
3. Require written approval for new employees, pay-rate changes, overtime and deductions; restrict access to payroll master records and retain an audit trail.
4. Reconcile payroll totals and bank payments each period and investigate unusual changes; arrange independent payroll checks and prompt removal of employees who leave.

Question 4(b) — 12 marks

The following are the budgeted overheads of Smart Clothing Company Limited for the year 2021.

Department	Amount Ksh	Basis of overhead absorption
Pattern drafting	3,000,000	15,000 labour hours
Cutting	2,000,000	10,000 labour hours
Machining	4,000,000	20,000 machine hours
Finishing	1,500,000	5,000 labour hours

(i) Selling and administration costs are charged at 12% of factory cost.

(ii) Profit is at the rate of 20% of the total cost.

(iii) The following data relates to Job Order Number X005.

JOB NO. X005: Raw materials Ksh 120,000. Direct labour:

Department	Job time and rate
Pattern drafting	100 labour hours at Ksh 100 per hour
Cutting	120 labour hours at Ksh 50 per hour
Machining	140 machine hours at Ksh 40 per hour
Finishing	150 labour hours at Ksh 20 per hour

(i) Prepare a job cost statement for Job Number X005.

(ii) A customer is willing to pay Ksh 340,000 for the job. Advise the management on whether to accept the job order or not.

Model answer

The offer covers the stated total cost and earns Ksh 47,008, so it can be accepted if capacity is available and a lower profit is permitted. It falls Ksh 11,590.40 below the target quotation. If the 20% markup is a strict minimum, negotiate at least Ksh 351,590.40 or decline; at Ksh 340,000 the markup is about 16.04%.

Question 5(a) — 8 marks

The following information relates to Liku Manufacturing Company for the year 2023.

Particulars	Ksh
Budgeted output	50,000 units
Budgeted direct materials	2,000,000
Budgeted direct labour (25,000 hours)	500,000
Budgeted overheads	1,000,000

Calculate the Overhead Absorption Rate (OAR) based on:

(i) unit of output;

(ii) direct labour hours;

(iii) percentage on direct material cost;

(iv) percentage on direct labour cost.

Model answer

Question 5(b) — 12 marks

Kibex Limited manufactures and sells product K12 in batches. The firm has received an order to manufacture 4,000 units of the product. The following information relates to the order.

Batch No. 007. Direct materials Ksh 350,000. Direct labour:

Department	Time and rate
A	130 direct labour hours at Ksh 50 per hour
B	85 direct labour hours at Ksh 100 per hour
C	110 machine hours at Ksh 60 per hour
D	200 machine hours at Ksh 40 per hour

(i) Overheads are absorbed at the rate of Ksh 20, Ksh 40, Ksh 50 and Ksh 30 for departments A, B, C and D respectively.

(ii) Selling and administration costs are absorbed at 10% of factory cost.

(iii) Profit is at 25% of the total cost.

Prepare a batch cost statement for batch No. 007, showing the:

(i) prime cost;

(ii) factory cost;

(iii) total cost;

(iv) selling price.

Model answer

The stated hourly charges under direct labour are treated as direct job charges, while departmental overhead is applied using the stated labour or machine hours.

Question 6(a) — 8 marks

Highlight four features of contract costing.

Model answer

1. Each substantial contract is a separate cost unit, with its own contract account.
2. Work is normally performed at the customer’s site and often extends over more than one accounting period.
3. Most materials, labour, site expenses and subcontractor charges can be traced directly to the contract.
4. Progress is certified and paid in stages, often with retention; profit recognition considers the stage of completion and uncertainty of the unfinished work.

Question 6(b) — 12 marks

The following information relates to the employees of Pepea Limited for the month of May 2022.

Clock No.	Name	Hours worked	Rate per hour Ksh	Salary advance Ksh
011	James	190	120	6,000
012	Joyce	180	100	5,000
013	Jadline	200	160	8,000
014	Glory	210	100	8,000
015	Robert	170	130	5,000
016	Kelly	200	140	7,000

Additional information:

(i) Normal working hours per month are 170 hours. Overtime is payable at a time and half the basic rate.

(ii) P.A.Y.E is at the rate of 10% of the gross wage.

(iii) N.S.S.F of Ksh 200 is deducted from each employee.

(iv) NHIF of Ksh 500 is deducted from each employee.

Prepare the payroll of Pepea Limited for the month of May 2022.

Model answer

Basic pay = 170 × hourly rate; overtime pay = hours above 170 × rate × 1.5. Gross = basic + overtime. Net pay = gross − PAYE − NSSF − NHIF − salary advance. These are the rates supplied for this historical examination exercise.

Question 7(a) — 8 marks

The following costs were incurred by Tawa Limited during the month of June 2022.

Particulars	Ksh
Rent	100,000
Salaries	260,000
Repairs and maintenance	120,000
Insurance	20,000
Raw materials	60,000
Wages	10,000

Calculate the total: (i) fixed cost; (ii) variable cost.

Model answer

With no further behaviour data, repairs and maintenance are treated as variable and wages as production wages. In practice maintenance may contain both fixed and variable elements.

Question 7(b) — 12 marks

Panday Limited manufactures Product X30 that passes through two processes, A and B. During the month of September 2022, 6,000 units of raw materials costing Ksh 480,000 was introduced in Process A. Subsequently, the following costs were incurred.

Cost	Process A Ksh	Process B Ksh
Additional direct materials	60,000	80,000
Direct labour	80,000	100,000
Direct expenses	12,000	10,000
Production overheads	28,000	28,500

Additional information:

(i) Normal loss was estimated at 10% and 5% for Process A and Process B respectively.

(ii) Output from Process A and Process B was 5,000 units and 4,700 units respectively.

The scrap from Process A and Process B is sold for Ksh 20 per unit and Ksh 44 per unit respectively. Prepare: (i) Process A account; (ii) Process B account; (iii) abnormal loss account.

Model answer

Process A account

Process B account

Abnormal loss account

Process B unit cost = (818,500 − 250×44)/4,750 = Ksh 170. Net abnormal loss = (48,000 − 8,000) + (8,500 − 2,200) = Ksh 46,300.