Cost Accounting — 2024
KNEC Diploma in Supply Chain Management, Module II. Original theory examination questions with explained model answers for revision.
November 2024
Paper codes: 2903/206; 2906/206; 2907/206; 2922/206; 2924/206
Time: 3 hours
Instructions: Answer any FIVE questions. All questions carry equal marks. Answer the questions in English.
Question 1(a) — 8 marks
Explain in each of the following terms as used in cost accounting:
(i) Cost; (2 marks)
(ii) Cost unit; (2 marks)
(iii) Cost allocation; (2 marks)
(iv) Cost centre. (2 marks)
Model answer
- Cost: the monetary measure of resources sacrificed to obtain an asset, service or other specified objective.
- Cost unit: a measurable unit of output or service to which costs are related, such as one tonne or one passenger-kilometre.
- Cost allocation: charging the whole of an identifiable cost directly to the cost centre or cost object that caused it.
- Cost centre: a location, function, person or equipment group for which costs are separately collected and controlled.
Question 1(b) — 12 marks
The following details relate to project undertaken by Baya Limited for the year 2023.
Particulars Ksh Contract price 7,000,000 Materials delivered to site 385,000 Wages paid 744,360 Site expenses paid 172,400 Plant purchased 1,300,000 Materials on site (31 December 2023) 128,000 Accrued wages (31 December 2023) 44,840 Value of work certified 1,700,000 Cash received on work certified 1,400,000 Work completed but not certified 44,000 Additional information.
(i) Depreciation on plant is charged at the rate of 20% per annum.
(ii) The contract commenced on 1 July 2023.
Prepare a contract account.
Model answer
| Step / item | Working | Result |
|---|---|---|
| Depreciation | 1,300,000 × 20% × 6/12 | 130,000 |
| Closing plant value | 1,300,000 − 130,000 | 1,170,000 |
| Wages charge | 744,360 + 44,840 | 789,200 |
| Materials consumed | 385,000 − 128,000 | 257,000 |
| Cost of work to date | 257,000 + 789,200 + 172,400 + 130,000 | 1,348,600 |
| Work value | 1,700,000 + 44,000 | 1,744,000 |
| Notional profit | 1,744,000 − 1,348,600 | 395,400 |
Baya Limited — Contract account, year ended 31 December 2023
| Dr — Particulars | Ksh | Cr — Particulars | Ksh |
|---|---|---|---|
| Materials delivered | 385,000 | Materials on site c/d | 128,000 |
| Wages paid and accrued | 789,200 | Plant on site c/d | 1,170,000 |
| Site expenses | 172,400 | Work certified | 1,700,000 |
| Plant at cost | 1,300,000 | Work uncertified | 44,000 |
| Notional profit transferred to notional profit account | 395,400 | ||
| Total | 3,042,000 | Total | 3,042,000 |
Cash received is credited to the contractee’s account, not treated as additional contract revenue. Certified progress is 1,700,000 ÷ 7,000,000 = 24.29%. Under the usual examination convention for a contract below 25% completion, no notional profit is transferred to profit and loss; Ksh 395,400 remains reserved.
Question 2(a) — 8 marks
Explain four features of an ideal cost accounting system.
Model answer
- Suitability: methods should reflect the organisation’s products, processes and information needs.
- Simplicity: procedures should be understandable and avoid unnecessary complexity.
- Accuracy and timeliness: reliable cost information must reach decision-makers when useful.
- Economy and flexibility: benefits should justify the operating cost and the system should adapt to changing needs.
Question 2(b) — 12 marks
The following information relates to Makini Manufacturers for the year 2023.
Particulars Ksh Inventory of raw materials — 1 January 2023 180,000 Inventory of raw materials — 31 December 2023 250,000 Purchase of raw materials 1,500,000 Carriage of raw materials 20,000 Wages 800,000 Depreciation on factory equipment 145,000 Office expenses 280,000 Selling and distribution costs 300,000 Depreciation on motor vehicles 225,000 Rent 450,000 Additional information.
(i) Wages are apportioned as follow: 3/5 to factory; 2/5 to office.
(ii) Rent is apportioned as follows: 2/3 to factory; 1/3 to office.
Prepare a cost statement for the year 2023.
Model answer
| Step / item | Working | Result |
|---|---|---|
| Factory wages | 800,000 × 3/5 | 480,000 |
| Office wages | 800,000 × 2/5 | 320,000 |
| Factory rent | 450,000 × 2/3 | 300,000 |
| Office rent | 450,000 × 1/3 | 150,000 |
| Particulars | Ksh |
|---|---|
| Opening raw materials | 180,000 |
| Purchases | 1,500,000 |
| Carriage inward | 20,000 |
| Less closing raw materials | -250,000 |
| Direct materials consumed | 1,450,000 |
| Direct factory wages | 480,000 |
| Prime cost | 1,930,000 |
| Factory depreciation | 145,000 |
| Factory rent | 300,000 |
| Factory cost | 2,375,000 |
| Office wages | 320,000 |
| Office expenses | 280,000 |
| Office rent | 150,000 |
| Cost after administration overheads | 3,125,000 |
| Selling and distribution | 300,000 |
| Motor-vehicle depreciation | 225,000 |
| Total cost | 3,650,000 |
No work-in-progress or finished-goods adjustments are supplied. Motor-vehicle depreciation is grouped with distribution on the assumption that the vehicles serve delivery. A different functional allocation would alter subtotals, but the total Ksh 3,650,000 remains unchanged.
Question 3(a) — 8 marks
Explain four advantages of using group incentive schemes in remunerating employees.
Model answer
- Teamwork: a shared reward encourages employees to cooperate.
- Suitable measurement: group output can be rewarded where individual contributions cannot be separated reliably.
- Mutual assistance: experienced employees have an incentive to help colleagues improve.
- Better overall flow: the team benefits from reducing bottlenecks and coordinating its work.
Question 3(b) — 12 marks
Magana uses material X24 in its production. The following information relates to the material for the month of May 2024.
May Transaction 1 Received 2000 kg at Ksh 100 each 2 Issued 1000 kg 5 Received 1500 kg at Ksh 120 each 15 Issued 500 kg 25 Received 1800 kg at Ksh 150 each 28 Received 900 kg at Ksh 180 each 30 Issued 3000 kg Prepare a stores ledger account using the First In First Out (FIFO) method of stock valuation.
Model answer
Issue the oldest available layer first. No opening balance is supplied.
| Date | Receipts: qty × rate = Ksh | Issues: qty × rate = Ksh | Balance qty | Balance Ksh | Balance layers |
|---|---|---|---|---|---|
| May 1 | 2,000 × 100 = 200,000 | 2,000 | 200,000 | 2,000 @ 100 | |
| May 2 | 1,000 × 100 = 100,000 | 1,000 | 100,000 | 1,000 @ 100 | |
| May 5 | 1,500 × 120 = 180,000 | 2,500 | 280,000 | 1,000 @ 100; 1,500 @ 120 | |
| May 15 | 500 × 100 = 50,000 | 2,000 | 230,000 | 500 @ 100; 1,500 @ 120 | |
| May 25 | 1,800 × 150 = 270,000 | 3,800 | 500,000 | 500 @ 100; 1,500 @ 120; 1,800 @ 150 | |
| May 28 | 900 × 180 = 162,000 | 4,700 | 662,000 | 500 @ 100; 1,500 @ 120; 1,800 @ 150; 900 @ 180 | |
| May 30 | 500 × 100 + 1,500 × 120 + 1,000 × 150 = 380,000 | 1,700 | 282,000 | 800 @ 150; 900 @ 180 |
Check: total cost available 812,000 − issues 530,000 = closing inventory Ksh 282,000.
Question 4(a) — 8 marks
Explain four types of industries in which batch costing may be applied.
Model answer
- Pharmaceutical production: a defined batch of tablets or other products is made and costed together.
- Food and bakery production: similar loaves, biscuits or packaged foods are produced in runs.
- Garment manufacturing: an order or run of identical sizes and designs forms a batch.
- Engineering components: a production run of similar parts, such as bolts or castings, shares setup and processing costs.
Question 4(b) — 12 marks
The following overheads relate to Makaya manufacturers for the year 2023.
Particulars Ksh X 630,000 Y 720,000 Z 450,000 M 210,000 N 270,000 Service department costs are apportioned as follows:
Service department Department % M X 20 M Y 40 M Z 30 M N 10 N X 40 N Y 20 N Z 20 N M 20 Prepare an overhead apportionment sheet using the repeated distribution method.
Model answer
| Allocation | X | Y | Z | M | N |
|---|---|---|---|---|---|
| Initial | 630,000 | 720,000 | 450,000 | 210,000 | 270,000 |
| M distribution 1 | 42,000 | 84,000 | 63,000 | -210,000 | 21,000 |
| N distribution 1 | 116,400 | 58,200 | 58,200 | 58,200 | -291,000 |
| M distribution 2 | 11,640 | 23,280 | 17,460 | -58,200 | 5,820 |
| N distribution 2 | 2,328 | 1,164 | 1,164 | 1,164 | -5,820 |
| M distribution 3 | 232.80 | 465.60 | 349.20 | -1,164 | 116.40 |
| N distribution 3 | 46.56 | 23.28 | 23.28 | 23.28 | -116.40 |
| M distribution 4 | 4.66 | 9.31 | 6.98 | -23.28 | 2.33 |
| N distribution 4 | 0.93 | 0.47 | 0.47 | 0.47 | -2.33 |
| M distribution 5 | 0.09 | 0.19 | 0.14 | -0.47 | 0.05 |
| N distribution 5 | 0.02 | 0.01 | 0.01 | 0.01 | -0.05 |
| M distribution 6 | 0.00 | 0.00 | 0.00 | -0.01 | 0.00 |
| N distribution 6 | 0.00 | 0.00 | 0.00 | 0.00 | -0.00 |
| M distribution 7 | 0.00 | 0.00 | 0.00 | -0.00 | 0.00 |
| N distribution 7 | 0.00 | 0.00 | 0.00 | 0.00 | -0.00 |
| Final totals | 802,653.06 | 887,142.86 | 590,204.08 | 0 | 0 |
Each service department is cleared in turn; reciprocal allocations are redistributed until negligible. The final production totals equal the original total overheads (subject only to display rounding).
| Particulars | Ksh |
|---|---|
| Final X | 802,653.06 |
| Final Y | 887,142.86 |
| Final Z | 590,204.08 |
| Check total | 2,280,000 |
Question 5(a) — 8 marks
Highlight four advantages of preparing an operating cost statement.
Model answer
- Determines cost per service unit, such as a passenger-kilometre or tonne-kilometre.
- Supports pricing, quotations and budget preparation.
- Enables comparison of actual costs with standards, budgets and earlier periods.
- Identifies inefficient resource use and supports corrective decisions.
Question 5(b) — 12 marks
Jenga Limited manufactures product J20 which passes through two processes to completion; process I and process II. The following information relates to process II.
Particulars Ksh Transfer from process I — 8,000 units 180,000 Direct wages 40,000 Direct materials introduced 60,000 Additional information
(i) Factory overheads in process II are absorbed at the rate of 400% of direct materials introduced.
(ii) Normal loss is 20%.
(iii) Units scrapped are sold at Ksh 10 each.
(iv) The number of units produced were 6,480 units.
Prepare:
(i) Process II account.
(ii) Abnormal loss/gain account.
Model answer
| Step / item | Working | Result |
|---|---|---|
| Overheads | 60,000 × 400% | 240,000 |
| Total process cost | 180,000 + 40,000 + 60,000 + 240,000 | 520,000 |
| Normal loss | 8,000 × 20% | 1,600 units |
| Expected good output | 8,000 − 1,600 | 6,400 units |
| Normal scrap value | 1,600 × 10 | 16,000 |
| Cost per expected good unit | (520,000 − 16,000) ÷ 6,400 | 78.75 |
| Abnormal gain | 6,480 − 6,400 | 80 units |
| Abnormal gain value | 80 × 78.75 | 6,300 |
| Good output value | 6,480 × 78.75 | 510,300 |
| Process II — Dr | Units | Ksh | Process II — Cr | Units | Ksh |
|---|---|---|---|---|---|
| Transfer from I | 8,000 | 180,000 | Normal loss | 1,600 | 16,000 |
| Direct wages | 40,000 | Finished output | 6,480 | 510,300 | |
| Direct materials | 60,000 | ||||
| Factory overheads | 240,000 | ||||
| Abnormal gain | 80 | 6,300 | |||
| Total | 8,080 | 526,300 | Total | 8,080 | 526,300 |
Abnormal gain account
| Dr — Particulars | Ksh | Cr — Particulars | Ksh |
|---|---|---|---|
| Scrap value forgone: 80 × 10 | 800 | Process II: 80 × 78.75 | 6,300 |
| Profit and loss — net gain | 5,500 | ||
| Total | 6,300 | Total | 6,300 |
Actual scrap is 8,000 − 6,480 = 1,520 units, giving Ksh 15,200. The abnormal gain saves 80 units but also removes Ksh 800 of expected scrap receipts, so net gain is Ksh 5,500.
Question 6(a) — 8 marks
The following estimates relate to Tamah limited for the year 2025.
Particulars Ksh Overhead cost 108,000 Direct material cost 96,000 Direct labour cost 120,000 Machine hours 30,000 Direct labour hours 54,000 Determine the overhead absorption rates using the various bases of apportionment.
Model answer
| Step / item | Working | Result |
|---|---|---|
| Direct material cost | 108,000 ÷ 96,000 × 100 | 112.5% |
| Direct labour cost | 108,000 ÷ 120,000 × 100 | 90% |
| Prime cost | 108,000 ÷ (96,000 + 120,000) × 100 | 50% |
| Machine hours | 108,000 ÷ 30,000 | Ksh 3.60 per machine hour |
| Direct labour hours | 108,000 ÷ 54,000 | Ksh 2 per labour hour |
Question 6(b) — 12 marks
The following information relates to materials XZ used by Meta Limited.
Particulars Information Average usage 10,000 kgs per day Minimum usage 8,000 kgs per day Maximum usage 13,500 kgs per day Order quantity 90,000 kgs lead time 4 days Determine the:
(i) Re-order level.
(ii) Maximum stock level.
(iii) Minimum stock level.
(iv) Average stock level.
Model answer
| Step / item | Working | Result |
|---|---|---|
| (i) Reorder level | Maximum usage × lead time = 13,500 × 4 | 54,000 kg |
| (ii) Maximum stock | 54,000 + 90,000 − (8,000 × 4) | 112,000 kg |
| (iii) Minimum stock | 54,000 − (10,000 × 4) | 14,000 kg |
| (iv) Average stock | Minimum stock + half order quantity = 14,000 + 90,000/2 | 59,000 kg |
The usual safety-stock-plus-half-order formula gives 59,000 kg. If an exercise instead explicitly defines average stock as the midpoint of maximum and minimum levels, that different measure is (112,000 + 14,000)/2 = 63,000 kg.
Question 7(a) — 8 marks
Highlight four differences between job costing and process costing
Model answer
| Job costing | Process costing |
|---|---|
| Costs are collected for a specific job or customer order. | Costs are collected for a process or department over a period. |
| Output is often customised and distinguishable. | Output is normally continuous and homogeneous. |
| Unit cost is job cost divided by units in that job. | Unit cost is averaged over process output or equivalent units. |
| Costs transfer on completion of the particular job. | Costs flow from process to process as production progresses. |
Question 7(b) — 12 marks
Waka Limited manufactures its products in batches. The following costs were incurred on batch number P40.
Particulars Information Department X 1260 labour hours at Ksh 10.5 per hour Department Y 2058 labour hours at Ksh 9 per hour Direct materials Ksh 9,840 Additional information
(i) Factory overheads are absorbed at the rate of Ksh 24 per hour for department X and Ksh 15 per hour for department Y.
(ii) The gross profit margin is 25%
(iii) Administration overheads are absorbed at 10% of the selling price.
(iv) The number of units produced were 3,000 units.
Calculate:
(i) The selling price per unit.
(ii) The total amount of administration overheads recovered by batch number P40.
(iii) The notional net profit per unit.
Model answer
| Step / item | Working | Result |
|---|---|---|
| Department X labour | 1,260 × 10.5 | 13,230 |
| Department Y labour | 2,058 × 9 | 18,522 |
| Direct materials | Given | 9,840 |
| Department X overhead | 1,260 × 24 | 30,240 |
| Department Y overhead | 2,058 × 15 | 30,870 |
| Batch factory cost | Sum of the five costs | 102,702 |
| Batch sales value | 102,702 ÷ (1 − 0.25) | 136,936 |
| (i) Selling price per unit | 136,936 ÷ 3,000 | 45.65 |
| (ii) Administration overhead | 136,936 × 10% | 13,693.60 |
| Notional net profit — batch | 136,936 − 102,702 − 13,693.60 | 20,540.40 |
| (iii) Net profit per unit | 20,540.40 ÷ 3,000 | 6.85 |
Final amounts rounded to cents: selling price Ksh 45.65 per unit; administration overhead Ksh 13,693.60; notional net profit Ksh 6.85 per unit. Margin is 25% of sales, not a 25% markup on cost.