Cost Accounting — Undated papers
KNEC Diploma in Supply Chain Management, Module II. Original theory examination questions with explained model answers for revision.
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Question 1(a) — 8 marks
Highlight four differences between financial accounting and cost accounting.
Model answer
| Aspect | Financial accounting | Cost accounting |
|---|---|---|
| Users | Reports mainly to external users such as owners and lenders. | Supports internal managers in planning and control. |
| Scope | Summarises the organisation’s overall profit, assets and liabilities. | Analyses costs by product, job, process or department. |
| Time focus | Primarily records and reports completed transactions. | Uses actual costs as well as estimates, standards and budgets. |
| Form of reports | Follows applicable financial reporting requirements. | Report detail and frequency are tailored to management needs. |
Question 1(b) — 12 marks
Kutu limited allows workers to take 8 minutes to produce one unit. The workers are paid Ksh 100 per hour. During the first week of October 2018, John produced 480 units in 52 hours.
(i) Determine the wage payable to John for the week under: I. Rowan scheme; II. Halsey scheme.
(ii) Based on the results in (i) above, advise the management on the cost effective scheme to choose.
Model answer
| Step / item | Working | Result |
|---|---|---|
| Time allowed | 480 × 8 ÷ 60 hours | 64 |
| Time saved | 64 − 52 hours | 12 |
| Basic wage | 52 × 100 | 5,200 |
| Rowan bonus | (12/64) × 52 × 100 | 975 |
| Rowan total wage | 5,200 + 975 | 6,175 |
| Halsey bonus (usual 50% sharing) | 50% × 12 × 100 | 600 |
| Halsey total wage | 5,200 + 600 | 5,800 |
The Halsey sharing percentage is not supplied; the standard 50% share is assumed and stated. On that basis choose Halsey for the lower immediate wage cost: Ksh 5,800 versus Ksh 6,175, saving Ksh 375 for the same output. With a different agreed sharing percentage, recalculate before comparing.
Question 2(a) — 8 marks
Explain the function of each of the following documents as used in material control: (i) quotation; (ii) purchase order; (iii) invoice; (iv) materials requisition note.
Model answer
- A quotation states a supplier’s proposed price, specification, delivery and payment terms, enabling comparison before purchase.
- A purchase order records and communicates the buyer’s authorised order and its agreed quantities, specification and terms.
- An invoice requests payment and states the goods supplied and charges; it is matched with the purchase order and receipt evidence before payment.
- A materials requisition note authorises stores to issue specified materials to a job or department and provides the basis for charging their cost.
Question 2(b) — 12 marks
The following information relates to a production department for the month of June 2018:
Particulars Ksh Inventory 1 June: raw materials 60,000 Inventory 1 June: work-in-progress 32,000 Inventory 30 June: raw materials 85,000 Inventory 30 June: work-in-progress 28,000 Purchase of raw materials 530,000 Carriage inwards 20,000 Direct wages 240,000 Factory overheads 210,000 Administration overheads 90,000 Selling and distribution overheads 124,000 Prepare a cost statement showing: (i) prime cost; (ii) factory cost; (iii) total cost.
Model answer
| Particulars | Ksh |
|---|---|
| Opening raw materials | 60,000 |
| Purchases | 530,000 |
| Carriage inwards | 20,000 |
| Less closing raw materials | -85,000 |
| Direct materials consumed | 525,000 |
| Direct wages | 240,000 |
| Prime cost | 765,000 |
| Factory overhead | 210,000 |
| Manufacturing cost before WIP | 975,000 |
| Opening work-in-progress | 32,000 |
| Less closing work-in-progress | -28,000 |
| Factory cost of completed output | 979,000 |
| Administration overhead | 90,000 |
| Selling/distribution overhead | 124,000 |
| Total cost | 1,193,000 |
Question 3(a) — 12 marks
Rex limited has four production departments; A, B, C and D. The following overheads relate to the firm for the year ended 30 June 2018:
Particulars Ksh Rent 100,000 Repairs to buildings 50,000 Supervision 80,000 Insurance to plant 60,000 Depreciation of plant 56,000 Light and heat 20,000 The following information is also available:
Item A B C D Area in square metres (m²) 1,500 1,200 800 500 Number of employees 35 30 25 10 Value of plant Ksh 120,000 80,000 60,000 40,000 Prepare an overhead analysis sheet.
Model answer
Total area = 4,000 m²; total employees = 100; total plant value = Ksh 300,000. Apportion each cost in the ratio of its appropriate basis.
| Overhead | Basis | A Ksh | B Ksh | C Ksh | D Ksh |
|---|---|---|---|---|---|
| Rent | Floor area | 37,500 | 30,000 | 20,000 | 12,500 |
| Repairs to buildings | Floor area | 18,750 | 15,000 | 10,000 | 6,250 |
| Supervision | Employees | 28,000 | 24,000 | 20,000 | 8,000 |
| Insurance to plant | Plant value | 24,000 | 16,000 | 12,000 | 8,000 |
| Depreciation of plant | Plant value | 22,400 | 14,933.33 | 11,200 | 7,466.67 |
| Light and heat | Floor area | 7,500 | 6,000 | 4,000 | 2,500 |
| Total | 138,150 | 105,933.33 | 77,200 | 44,716.67 |
Check: department totals sum to Ksh 366,000.
Question 3(b) — 8 marks
Explain the meaning of each of the terms as used in process costing: (i) normal loss; (ii) abnormal gain; (iii) waste; (iv) scrap.
Model answer
- Normal loss is the unavoidable expected loss under efficient operating conditions; its net cost is borne by expected good production.
- Abnormal gain occurs when actual process loss is less than expected normal loss, so output exceeds the expected yield.
- Waste is process material lost with no appreciable recovery value, such as evaporation; disposal may even incur cost.
- Scrap is residual material or rejected output with a recoverable sale or reuse value, credited to the appropriate process or loss account.
Question 4(a) — 10 marks
The following data relates to Job number 006 that passes through three departments; A, B and C.
Particulars Ksh Materials issued from store 85,000 Materials purchases 27,000 Direct labour:
Department Time and rate A 50 labour hours at Ksh 12 per hour B 200 labour hours at Ksh 20 per hour C 120 labour hours at Ksh 10 per hour Additional information:
(i) The factory overheads are absorbed based on direct labour hours. The rate of absorption for departments A, B and C are Ksh 3, Ksh 7 and Ksh 6 respectively.
(ii) Administration and selling overheads are absorbed at 10% of the factory cost.
(iii) Profit is charged at 25% of the cost.
(i) Prepare a job cost sheet showing: I. prime cost; II. factory cost; III. total cost.
(ii) Determine the price to be quoted for the job.
Model answer
| Department | Direct labour Ksh | Overhead Ksh |
|---|---|---|
| A | 50 × 12 = 600 | 50 × 3 = 150 |
| B | 200 × 20 = 4,000 | 200 × 7 = 1,400 |
| C | 120 × 10 = 1,200 | 120 × 6 = 720 |
| Total | 5,800 | 2,270 |
| Particulars | Ksh |
|---|---|
| Materials: 85,000 + 27,000 | 112,000 |
| Direct labour | 5,800 |
| Prime cost | 117,800 |
| Factory overhead | 2,270 |
| Factory cost | 120,070 |
| Administration/selling: 10% | 12,007 |
| Total cost | 132,077 |
| Profit: 25% × 132,077 | 33,019.25 |
| Quotation | 165,096.25 |
Question 4(b) — 10 marks
A company lorry carries nine tonnes on a single trip and delivers are made to three different towns; A, B and C. The table below shows the distance covered to each town and the respective quantities delivered.
From To Distance km Quantity delivered tonnes Company premises Town A 20 3 Town A Town B 10 2 Town B Town C 30 4 Total 60 9 The lorry returns empty after delivery to town C. The following are the costs per trip:
Particulars Ksh Fuel 4,000 Driver wages 1,500 Assistant driver wages 800 Calculate the: (i) cost per tonne-kilometre; (ii) cost per kilometre.
Model answer
| Leg | Load carried tonnes | Distance km | Tonne-km |
|---|---|---|---|
| Premises to A | 9 | 20 | 180 |
| A to B: 9 − 3 | 6 | 10 | 60 |
| B to C: 6 − 2 | 4 | 30 | 120 |
| Empty return | 0 | 60 | 0 |
| Total | 120 | 360 |
| Step / item | Working | Result |
|---|---|---|
| Trip cost | 4,000 + 1,500 + 800 | 6,300 |
| Cost per tonne-km | 6,300 ÷ 360 | 17.50 |
| Cost per kilometre | 6,300 ÷ 120 | 52.50 |
The empty return adds kilometres and cost but no freight tonne-kilometres. Use actual loads carried on each leg, rather than assuming the full nine tonnes remain aboard to town C.
Question 5(a) — 8 marks
Smart clothing limited operates three departments. The following are the budgeted overheads and the units of absorption for each department.
Department Overhead Ksh Absorption base Preparation 150,000 15,000 labour hours Machinery 200,000 25,000 machine hours Finishing 300,000 30,000 labour laws [printed] The following costs relate to Batch No. x220 produced and sold during the year 2018:
Particulars Ksh Raw materials 100,000 Labour:
Department Time and rate Preparation 150 hours at Ksh 12 per hour Machining 100 hours at Ksh 30 per hour Finishing 100 hours at Ksh 10 per hour Additional information:
(i) Selling and administration overheads are absorbed at 10% of production costs.
(ii) Profit is 20% of the total costs.
Calculate the: (i) overhead absorption rate of each department; (ii) total cost of the batch; (iii) selling price of the batch.
Model answer
The printed “labour laws” in the finishing base is interpreted as labour hours, consistently with the job time and the other absorption bases.
| Department | OAR | Batch overhead Ksh |
|---|---|---|
| Preparation | 150,000/15,000 = Ksh 10 per labour hour | 1,500 |
| Machinery | 200,000/25,000 = Ksh 8 per machine hour | 800 |
| Finishing | 300,000/30,000 = Ksh 10 per labour hour | 1,000 |
| Particulars | Ksh |
|---|---|
| Direct materials | 100,000 |
| Direct labour: 150×12 + 100×30 + 100×10 | 5,800 |
| Prime cost | 105,800 |
| Factory overhead | 3,300 |
| Production cost | 109,100 |
| Selling/administration: 10% | 10,910 |
| Total batch cost | 120,010 |
| Profit: 20% | 24,002 |
| Batch selling price | 144,012 |
Question 5(b) — 12 marks
Mjengo construction company was awarded a contract to construct a building in the year 2010. The contract is nearing completion. The following data relates to the contract for the year ended 31 August 2018:
Particulars Ksh Materials on site: 1 September 2017 1,260,000 Materials purchased 5,300,000 Direct expenses paid 2,400,000 Direct expenses accrued 20,000 Plant purchased and installed 800,000 Direct wages paid 4,700,000 Direct wages accrued 60,000 Establishment charges 320,000 Materials returned to stores 190,000 Value of work certified 16,500,000 Cost of work not yet certified 2,500,000 Materials on site: 31 August 2018 520,000 Value of plant: 31 August 2018 30,000 Cash received from client 13,000,000 (i) Prepare a: I. contract account; II. contractee account.
(ii) Calculate the amount of profit to be taken.
Model answer
| Step / item | Working | Result |
|---|---|---|
| Materials consumed | 1,260,000 + 5,300,000 − 190,000 − 520,000 | 5,850,000 |
| Plant consumed / depreciation | 800,000 − 30,000 | 770,000 |
| Wages | 4,700,000 + 60,000 | 4,760,000 |
| Direct expenses | 2,400,000 + 20,000 | 2,420,000 |
| Contract cost | 5,850,000 + 770,000 + 4,760,000 + 2,420,000 + 320,000 | 14,120,000 |
| Work value | 16,500,000 + 2,500,000 | 19,000,000 |
| Notional profit | 19,000,000 − 14,120,000 | 4,880,000 |
Contract account
| Dr — Particulars | Ksh | Cr — Particulars | Ksh |
|---|---|---|---|
| Opening materials | 1,260,000 | Materials returned | 190,000 |
| Materials purchased | 5,300,000 | Closing materials | 520,000 |
| Direct expenses including accrued | 2,420,000 | Closing plant | 30,000 |
| Plant purchased | 800,000 | Work certified | 16,500,000 |
| Wages including accrued | 4,760,000 | Work uncertified | 2,500,000 |
| Establishment charges | 320,000 | ||
| Notional profit | 4,880,000 | ||
| Total | 19,740,000 | Total | 19,740,000 |
Contractee account
| Dr — Particulars | Ksh | Cr — Particulars | Ksh |
|---|---|---|---|
| Work certified | 16,500,000 | Cash received | 13,000,000 |
| Balance carried down | 3,500,000 | ||
| Total | 16,500,000 | Total | 16,500,000 |
Profit recognition limitation: for a contract nearing completion, the estimated total contract profit and a completion/cash ratio are normally needed. The question gives neither the total contract price nor estimated remaining cost, and gives no profit-transfer policy. A unique near-completion profit therefore cannot be determined.
| Step / item | Working | Result |
|---|---|---|
| Conventional provisional alternative | 2/3 × 4,880,000 × (13,000,000/16,500,000) | 2,563,232.32 |
| Reserve on that stated convention | 4,880,000 − 2,563,232.32 | 2,316,767.68 |
The Ksh 2,563,232.32 figure is conditional on using the usual two-thirds notional-profit convention; it is not a calculated estimated total profit. No missing contract price, completion estimate or earlier-year balance has been invented.
Question 6(a) — 8 marks
Explain four benefits of cost accounting to a manufacturing organization.
Model answer
- It measures product and process costs so management can set informed prices and evaluate margins.
- It supports planning through material, labour and overhead budgets and resource estimates.
- It reveals waste and inefficiency by comparing actual costs with standards and budgets, enabling corrective action.
- It supports decisions such as product mix, make-or-buy and process selection, and provides a basis for inventory valuation.
Question 6(b) — 12 marks
Zetu Manufacturers uses material K10 in its production. The following transactions relate to the materials for the month of September 2018:
Date in September Transaction 4 Bought 100 units at Ksh 40 each 8 Issued 60 units 12 Issued 30 units 15 Bought 40 units at Ksh 35 each 20 Issued 30 units 22 Bought 50 units at Ksh 40 each 23 Issued 50 units 24 Bought 160 units at Ksh 43 each 30 Issued 100 units For the month of September 2018: (i) prepare a stores ledger account using the First-In-First-Out (FIFO) method; (ii) determine the value of the closing inventory.
Model answer
| Date | Receipts: qty × rate = Ksh | Issues: qty × rate = Ksh | Balance qty | Balance Ksh | Balance layers |
|---|---|---|---|---|---|
| Sept 4 | 100 × 40 = 4,000 | 100 | 4,000 | 100 @ 40 | |
| Sept 8 | 60 × 40 = 2,400 | 40 | 1,600 | 40 @ 40 | |
| Sept 12 | 30 × 40 = 1,200 | 10 | 400 | 10 @ 40 | |
| Sept 15 | 40 × 35 = 1,400 | 50 | 1,800 | 10 @ 40; 40 @ 35 | |
| Sept 20 | 10 × 40 + 20 × 35 = 1,100 | 20 | 700 | 20 @ 35 | |
| Sept 22 | 50 × 40 = 2,000 | 70 | 2,700 | 20 @ 35; 50 @ 40 | |
| Sept 23 | 20 × 35 + 30 × 40 = 1,900 | 20 | 800 | 20 @ 40 | |
| Sept 24 | 160 × 43 = 6,880 | 180 | 7,680 | 20 @ 40; 160 @ 43 | |
| Sept 30 | 20 × 40 + 80 × 43 = 4,240 | 80 | 3,440 | 80 @ 43 |
Check: total cost available 14,280 − issues 10,840 = closing inventory Ksh 3,440.
Closing inventory consists of 80 units from the last receipt at Ksh 43: value Ksh 3,440.
Question 7(a) — 8 marks
Differentiate the following terms applied when costing for overheads: (i) under absorption and overabsorption; (ii) controllable costs and non-controllable costs.
Model answer
- Underabsorption occurs when overhead charged to production is less than actual overhead incurred; the shortfall is an adverse adjustment. Overabsorption occurs when the amount charged exceeds actual overhead, producing a favourable adjustment.
- Controllable costs can be significantly influenced by a specified manager within the relevant period. Non-controllable costs cannot be significantly influenced by that manager in that period, although another level of management may control them.
Question 7(b) — 12 marks
Pita Limited manufactures product K20 that passes through two processes; 1 and 2. 2,000 kilograms of materials at a cost Ksh 50 per kilogram is introduced to process I. The following additional information relates to process 1:
Particulars Ksh Labour cost 30,000 Production overheads 23,000 Normal loss is estimated at 10%. The actual output from process 1 was 1,580 kilograms.
(i) Prepare process 1 account;
(ii) Based on the results in (i) above, advise the management on the process losses.
Model answer
No scrap value is given, so loss recovery is taken as zero.
Process I account
| Step / item | Working | Result |
|---|---|---|
| Total input | 2000 + 0 | 2,000 |
| Total cost | Transfer + materials + wages + overheads + expenses | 153,000 |
| Normal loss | 2000 × 10% | 200 |
| Expected output | 2000 − 200 | 1,800 |
| Normal scrap value | 200 × 0 | 0 |
| Cost per good unit | (153,000 − 0) ÷ 1800 | 85 |
| Actual output value | 1580 × 85.000000 | 134,300 |
| Abnormal loss | 1800 − 1580 | 220 |
| Dr particulars | Units | Ksh | Cr particulars | Units | Ksh |
|---|---|---|---|---|---|
| Input / transfer | 2,000 | 100,000 | Normal loss | 200 | 0 |
| Direct wages | 30,000 | Output transferred | 1,580 | 134,300 | |
| Overheads | 23,000 | Abnormal loss | 220 | 18,700 | |
| Total | 2,000 | 153,000 | Total | 2,000 | 153,000 |
Actual loss = 2,000 − 1,580 = 420 kg (21% of input). Expected normal loss is 200 kg (10%); the excess 220 kg is abnormal loss valued at 220 × Ksh 85 = Ksh 18,700. Investigate avoidable causes such as poor-quality inputs, machine faults, incorrect settings or handling errors, and take corrective action. The abnormal loss is charged separately to costing profit and loss rather than increasing the normal cost of good output.