Cost Accounting — 2021
KNEC Diploma in Supply Chain Management, Module II. Original theory examination questions with explained model answers for revision.
July 2021
Paper codes: 2903/206
Time: Not shown in supplied scan
Instructions: Not shown in supplied scan
Question 1(a) — 8 marks
Highlight four benefits of using piece rate method of remuneration.
Model answer
- Pay is directly linked to output, encouraging workers to increase productive effort.
- Efficient workers can earn more by producing more acceptable units, rewarding individual performance.
- Labour cost per acceptable unit is predictable where the piece rate is fixed, helping quotations and cost control.
- Less close supervision of working pace is needed because earnings depend on measured output, although quality and safety still need checking.
Question 1(b) — 12 marks
Barishak Limited uses material Bx in its production. On 1 January 2021, inventory was 400 units valued at Ksh 20,000. The following transactions relate to the month of January 2021:
Date in January Transaction 2 Received 120 units at Ksh 51 each 4 Issued 80 units 5 Issued 140 units 7 Received 50 units at Ksh 52 each 10 Issued 290 units 14 Issued 5 units 15 Received 320 units at Ksh 50 each 27 Received 200 units at Ksh 49 each 31 Issued 350 units Prepare a stores ledger account using First In First Out (FIFO) method of inventory valuation.
Model answer
Opening unit cost = 20,000/400 = Ksh 50. Issue the oldest available units first.
| Date | Receipts: qty × rate = Ksh | Issues: qty × rate = Ksh | Balance qty | Balance Ksh | Balance layers |
|---|---|---|---|---|---|
| Opening | 400 | 20,000 | 400 @ 50 | ||
| Jan 2 | 120 × 51 = 6,120 | 520 | 26,120 | 400 @ 50; 120 @ 51 | |
| Jan 4 | 80 × 50 = 4,000 | 440 | 22,120 | 320 @ 50; 120 @ 51 | |
| Jan 5 | 140 × 50 = 7,000 | 300 | 15,120 | 180 @ 50; 120 @ 51 | |
| Jan 7 | 50 × 52 = 2,600 | 350 | 17,720 | 180 @ 50; 120 @ 51; 50 @ 52 | |
| Jan 10 | 180 × 50 + 110 × 51 = 14,610 | 60 | 3,110 | 10 @ 51; 50 @ 52 | |
| Jan 14 | 5 × 51 = 255 | 55 | 2,855 | 5 @ 51; 50 @ 52 | |
| Jan 15 | 320 × 50 = 16,000 | 375 | 18,855 | 5 @ 51; 50 @ 52; 320 @ 50 | |
| Jan 27 | 200 × 49 = 9,800 | 575 | 28,655 | 5 @ 51; 50 @ 52; 320 @ 50; 200 @ 49 | |
| Jan 31 | 5 × 51 + 50 × 52 + 295 × 50 = 17,605 | 225 | 11,050 | 25 @ 50; 200 @ 49 |
Check: total cost available 54,520 − issues 43,470 = closing inventory Ksh 11,050.
Question 2(a) — 8 marks
Explain each of the following types of costs: (i) opportunity cost; (ii) relevant cost; (iii) sunk cost; (iv) unit cost.
Model answer
- Opportunity cost is the benefit forgone from the best alternative use of a scarce resource; for example rental income sacrificed by using one’s own building.
- Relevant cost is a future cash flow that differs between alternatives and should therefore affect the decision.
- Sunk cost is expenditure already incurred that cannot be recovered by changing the current decision, such as completed research spending.
- Unit cost is the total cost attributable to an output divided by the number of units produced, using a clearly specified cost scope and period.
Question 2(b) — 12 marks
Ochieng has been offered Ksh 20,000 to repair and paint a motor van. The following information relates to the job.
(i) 4 metres of metal sheet at Ksh 500 per metre
(ii) 20 litres of spray paint at Ksh 150 per litre
(iii) Welding 3 hours at Ksh 400 per hour
(iv) Painting 4 hours Ksh 600 per hour
(v) Wiring Ksh 1,500 per vehicle
(vi) Security Ksh 200 per day
(vii) Riveting 30 rivets at Ksh 20 each
(viii) Administration cost Ksh 2,200
(ix) Parking fee Ksh 150 per day
(i) Ochieng expects to complete the work in 3 days’ period as required by the client.
(ii) Mark up profit is 30%.
(i) Prepare an operation cost statement;
(ii) Advise Ochieng on whether to accept the job or not.
Model answer
| Particulars | Ksh |
|---|---|
| Metal sheet: 4 × 500 | 2,000 |
| Spray paint: 20 × 150 | 3,000 |
| Welding: 3 × 400 | 1,200 |
| Painting: 4 × 600 | 2,400 |
| Wiring | 1,500 |
| Security: 3 × 200 | 600 |
| Rivets: 30 × 20 | 600 |
| Administration | 2,200 |
| Parking: 3 × 150 | 450 |
| Total operating cost | 13,950 |
| Target profit: 30% × 13,950 | 4,185 |
| Target price | 18,135 |
| Offer | 20,000 |
| Profit at offer | 6,050 |
Accept the job: the offer exceeds the target price by Ksh 1,865 and earns Ksh 6,050, a markup of 6,050/13,950 × 100 = 43.37%, above the required 30%.
Question 3(a) — 8 marks
Mark and Janet are employed to make bar soaps. In the first week of February 2021, Mark made 1,240 units while Janet made 1,185 units. The time allowed per unit is 10 minutes. Each employee is entitled to a basic wage of Ksh 50 per hour. Bonus is paid at 35% of the basic wage rate. Mark and Janet completed the work in 190 hours and 200 hours respectively.
For each employee, determine the: (i) basic wage; (ii) gross wage.
Model answer
Time allowed = units × 10/60 hours. Basic wage = actual hours × Ksh 50. Bonus = positive time saved × 35% × Ksh 50; no bonus where time taken exceeds time allowed.
| Employee | Time allowed h | Actual h | Time saved h | Basic Ksh | Bonus Ksh | Gross Ksh |
|---|---|---|---|---|---|---|
| Mark | 206.67 | 190 | 16.67 | 9,500 | 291.67 | 9,791.67 |
| Janet | 197.50 | 200 | 0 | 10,000 | 0 | 10,000 |
Mark’s bonus is 16⅔ × 17.50 = Ksh 291.67. Janet exceeds her allowed 197.5 hours, so she receives her basic wage without bonus.
Question 3(b) — 12 marks
Hadithi manufactures a product that passes through two processes to completion. The following information relates to the month of January 2021.
Process I:
Particulars Ksh Materials 6,000 units at Ksh 100 each Labour 165,000 Overheads 24,000 Process II:
Particulars Ksh Additional materials 200,000 Packaging 15,000 Overheads 43,000 Additional information:
(i) The expected normal loss is 6% for process I only.
(ii) There was no opening or closing work in progress in the month.
(iii) 5,720 units of the product were transferred from Process I to process II.
Prepare: (i) process I account; (ii) process II account; (iii) abnormal gain/loss account.
Model answer
No scrap value or additional physical units in Process II are stated; normal loss therefore has zero recovery value, and all 5,720 units leave Process II.
Process I account
| Step / item | Working | Result |
|---|---|---|
| Total input | 6000 + 0 | 6,000 |
| Total cost | Transfer + materials + wages + overheads + expenses | 789,000 |
| Normal loss | 6000 × 6% | 360 |
| Expected output | 6000 − 360 | 5,640 |
| Normal scrap value | 360 × 0 | 0 |
| Cost per good unit | (789,000 − 0) ÷ 5640 | 139.89 |
| Actual output value | 5720 × 139.893617 | 800,191.49 |
| Abnormal gain | 5720 − 5640 | 80 |
| Dr particulars | Units | Ksh | Cr particulars | Units | Ksh |
|---|---|---|---|---|---|
| Input / transfer | 6,000 | 600,000 | Normal loss | 360 | 0 |
| Direct wages | 165,000 | Output transferred | 5,720 | 800,191.49 | |
| Overheads | 24,000 | ||||
| Abnormal gain | 80 | 11,191.49 | |||
| Total | 6,080 | 800,191.49 | Total | 6,080 | 800,191.49 |
Process II account
| Step / item | Working | Result |
|---|---|---|
| Total input | 5720 + 0 | 5,720 |
| Total cost | Transfer + materials + wages + overheads + expenses | 1,058,191.49 |
| Normal loss | 5720 × 0% | 0 |
| Expected output | 5720 − 0 | 5,720 |
| Normal scrap value | 0 × 0 | 0 |
| Cost per good unit | (1,058,191.49 − 0) ÷ 5720 | 185.00 |
| Actual output value | 5720 × 184.998512 | 1,058,191.49 |
| Abnormal gain | 5720 − 5720 | 0 |
| Dr particulars | Units | Ksh | Cr particulars | Units | Ksh |
|---|---|---|---|---|---|
| Input / transfer | 5,720 | 800,191.49 | Normal loss | 0 | 0 |
| Materials introduced | 200,000 | Output transferred | 5,720 | 1,058,191.49 | |
| Overheads | 43,000 | ||||
| Direct expenses | 15,000 | ||||
| Total | 5,720 | 1,058,191.49 | Total | 5,720 | 1,058,191.49 |
Abnormal gain account
| Dr — Particulars | Ksh | Cr — Particulars | Ksh |
|---|---|---|---|
| Process I: 80 × 139.893617 | 11,191.49 | Costing profit and loss | 11,191.49 |
| Total | 11,191.49 | Total | 11,191.49 |
Question 4(a) — 8 marks
Explain four advantages of factory job costing.
Model answer
- It identifies the cost and profit of each separate job, allowing management to compare profitable and unprofitable orders.
- Detailed material, labour and overhead records support reliable quotations for similar future jobs.
- Actual job costs can be compared with estimates so waste, excess time and other cost overruns can be investigated.
- Job records establish responsibility and provide evidence for charging customers and valuing unfinished jobs.
Question 4(b) — 12 marks
Hausta Limited manufactures cements in batches of 2,000 bags. The following information relates to batch No. AA 44.
Item Department I Department II Direct materials 6,000 kg at Ksh 90 each 1,000 kg Ksh 10 each Direct wages 800 hours at Ksh 40 per hour 100 hours at Ksh 70 per hour Factory overhead 110% on direct wages 70% on prime cost A client has offered to buy the batch at Ksh 600,000.
(i) Prepare a batch cost statement;
(ii) Advise the management on whether to accept the offer or not.
Model answer
| Item | Department I Ksh | Department II Ksh | Total Ksh |
|---|---|---|---|
| Materials | 540,000 | 10,000 | 550,000 |
| Direct wages | 32,000 | 7,000 | 39,000 |
| Prime cost | 572,000 | 17,000 | 589,000 |
| Overhead: I 110%×32,000; II 70%×17,000 | 35,200 | 11,900 | 47,100 |
| Batch factory cost | 607,200 | 28,900 | 636,100 |
| Step / item | Working | Result |
|---|---|---|
| Cost per bag | 636,100 ÷ 2,000 | 318.05 |
| Offer per bag | 600,000 ÷ 2,000 | 300 |
| Loss at offer | 600,000 − 636,100 | -36,100 |
Reject or renegotiate the offer on the full-cost information supplied: it produces a loss of Ksh 36,100. Department II overhead uses its own prime cost; no requirement to include the previous department’s transferred cost in that basis is stated.
Question 5(a) — 8 marks
Explain each of the following terms as used in process costing: (i) normal loss; (ii) abnormal loss; (iii) abnormal gain; (iv) scrap value.
Model answer
- Abnormal loss: the loss above the normal allowance, isolated from the cost of efficient output.
- Abnormal gain: the saving when actual loss is below the normal allowance.
- Normal loss: expected unavoidable wastage under efficient process conditions.
- Scrap value: proceeds recoverable from selling the rejected or lost material.
Question 5(b) — 12 marks
Pendaxo Enterprises has two departments; A and B. The following data relates to the departments for the months of February 2021:
Item Department A Department B Direct materials (Ksh) 1,450,000 90,000 Direct labour hours 30,000 5,000 Direct labour cost (Ksh) 210,000 75,000 Additional information: The firm uses direct labour hours in absorbing overheads in department A and prime cost in department B.
(i) Determine the overhead absorption rate for each department;
(ii) Prepare a cost statement for Job No. 1880 A.
Model answer
Source limitation: the supplied printed question gives neither departmental overhead totals nor the materials and labour used by Job 1880 A. These values are also absent from the scan, so a unique numerical rate or job total cannot be calculated without inventing data.
| Step / item | Working | Result |
|---|---|---|
| Department A prime cost | 1,450,000 + 210,000 | 1,660,000 |
| Department B prime cost | 90,000 + 75,000 | 165,000 |
| Required result | Correct method with missing data shown explicitly |
|---|---|
| Department A OAR | A’s budgeted overhead ÷ 30,000 = Ksh per direct labour hour |
| Department B OAR | B’s budgeted overhead ÷ 165,000 × 100 = percentage of prime cost |
| Job prime cost | Job’s direct materials + direct labour + any direct expenses |
| Job overhead, A | Job’s A labour hours × A OAR |
| Job overhead, B | Job’s B prime cost × B OAR/100 |
| Job factory cost | Job prime cost + A overhead + B overhead |
The departmental figures above must not be passed off as the resource usage of Job 1880 A. Once the missing overhead budgets and job particulars are supplied, substitute them in the displayed method.
Question 6(a) — 8 marks
Outline four features of an effective cost accounting system.
Model answer
- It suits the organisation’s production methods, cost units and information needs.
- It provides accurate and timely cost information using reliable records and consistent procedures.
- It is economical to operate, with benefits greater than the cost of collecting and processing data.
- It clearly assigns responsibility and reports useful comparisons, while remaining simple enough for staff to understand and flexible enough for operational changes.
Question 6(b) — 12 marks
Seiko Manufacturers has two production departments; machining and assembly and two service departments, canteen and maintenance. The budgeted overheads for the year 2020 was as follows:
Particulars Ksh Indirect wages 1,000,000 Rent 1,200,000 Lighting 240,000 Depreciation 250,000 Insurance 500,000 Direct allocation:
Item Machinery Ksh Assembly Ksh Canteen Ksh Maintenance Ksh Administration 130,000 240,000 198,000 190,000 Repairs 550,000 280,000 — 146,000 Additional information: The following data relates to the departments:
Department Machine value Ksh 000 Floor area m² Employees Machining 1,800 130 10 Assembly 1,400 55 23 Canteen 10 20 2 Maintenance 290 35 15 Prepare an overhead analysis sheet.
Model answer
Use employee numbers for indirect wages, floor area for rent and lighting, and machine values for plant depreciation and insurance. Directly allocated costs go to their stated departments.
| Overhead | Basis | Machining | Assembly | Canteen | Maintenance |
|---|---|---|---|---|---|
| Indirect wages | Employees 10:23:2:15 | 200,000 | 460,000 | 40,000 | 300,000 |
| Rent | Floor area 130:55:20:35 | 650,000 | 275,000 | 100,000 | 175,000 |
| Lighting | Floor area | 130,000 | 55,000 | 20,000 | 35,000 |
| Depreciation | Machine value 1,800:1,400:10:290 | 128,571.43 | 100,000 | 714.29 | 20,714.29 |
| Insurance | Machine value | 257,142.86 | 200,000 | 1,428.57 | 41,428.57 |
| Administration | Direct allocation | 130,000 | 240,000 | 198,000 | 190,000 |
| Repairs | Direct allocation | 550,000 | 280,000 | 0 | 146,000 |
| Total | 2,045,714.29 | 1,610,000 | 360,142.86 | 908,142.86 |
All amounts are Ksh. Total overhead = Ksh 4,924,000. No basis is provided for redistributing service-department costs, so this is the primary overhead analysis requested.
Question 7(a) — 10 marks
Highlight five duties of a cost accountant in a manufacturing firm.
Model answer
- Measure costs: collect and classify material, labour and overhead expenditure.
- Plan and budget: prepare cost estimates, standards and resource budgets.
- Control performance: analyse variances and report waste or inefficiency.
- Support decisions: provide relevant cost information for pricing, make-or-buy and product decisions.
- Advise management on pricing, product mix and make-or-buy decisions using relevant cost and contribution information.
Question 7(b) — 10 marks
Mjengo Limited was awarded a contract to construct a building block for Ksh 10,000,000. The work began at the start of the year 2019. The following information relates to the year ended 31 December 2020.
Particulars Ksh Plant on site (1 January 2020) 2,500,000 Plant purchased 1,300,000 Inspection fees 40,000 Materials purchased 1,800,000 Salaries and wages 450,000 Value of work certified 6,935,000 Cost of work not yet certified 1,550,000 Consultancy fees 30,000 Sub-contractors fees 145,000 Balances as at 31 December 2020:
Particulars Ksh Materials 480,000 Plant 1,900,000 Accrued wages 70,000 Additional information:
(i) It is the policy of the firm to transfer 20% of the notional profit to the income statement.
(ii) The firm sold some of the materials costing Ksh 100,000 at the site.
Prepare a contract account for the year ended 31 December 2020.
Model answer
| Step / item | Working | Result |
|---|---|---|
| Plant depreciation | 2,500,000 + 1,300,000 − 1,900,000 | 1,900,000 |
| Materials consumed | 1,800,000 − 480,000 − 100,000 | 1,220,000 |
| Wages accrued | 450,000 + 70,000 | 520,000 |
| Total net contract cost | 1,900,000 + 1,220,000 + 520,000 + 40,000 + 30,000 + 145,000 | 3,855,000 |
| Work value | 6,935,000 + 1,550,000 | 8,485,000 |
| Notional profit | 8,485,000 − 3,855,000 | 4,630,000 |
| Income statement: stated policy | 4,630,000 × 20% | 926,000 |
| Profit retained in work in progress | 4,630,000 × 80% | 3,704,000 |
Contract account
| Dr — Particulars | Ksh | Cr — Particulars | Ksh |
|---|---|---|---|
| Plant on site | 2,500,000 | Closing plant | 1,900,000 |
| Plant purchased | 1,300,000 | Closing materials | 480,000 |
| Materials purchased | 1,800,000 | Materials sold: cost removed | 100,000 |
| Wages including accrued | 520,000 | Work certified | 6,935,000 |
| Inspection fees | 40,000 | Uncertified work | 1,550,000 |
| Consultancy fees | 30,000 | ||
| Subcontractors | 145,000 | ||
| Notional profit | 4,630,000 | ||
| Total | 10,965,000 | Total | 10,965,000 |
The material sale removes its stated cost from the contract; no sale proceeds are given, so no sale profit is invented. The account uses the figures supplied for 2020. No opening certified/uncertified work or prior-year profit balance is supplied despite the 2019 commencement date; therefore a reconciliation of cumulative profit by year is not possible.