QUESTION ONE SECTION I Wangu Manufacturing Company Ltd. is located at the industrial area in Nairobi. The company uses four different machine groups, A, B, C and D in its manufacturing process. The overhead costs budget for the year ending 31 December 2003 is as follows: Indirect wages Holiday pay and national insurance Supervision Machine maintenance (wages) Supplies Power Tooling costs Insurance of machinery Insurance of buildings Depreciation Rent and rates 12,000 10,200 1,80 14,000 4,200 13,300 2,520 1,00 10,500 12,400 100,000 At present, overheads are absorbed into the cost of the company s products by means of a single direct wages percentage of 70 percent. The company wishes to change to machine hour overhead absorption rate for each of its four different machine groups. The following data is available for each of the four machine groups: Tooling costs Supervision Supplies Cost of machines Machine groups A B C D Total 5,400 5,170 1,200 32,000 4,100 4,720 800 24,000 3,30 200 1,200 3,10 400 18,000 13,300 1,80 84,000 Machine maintenance hours Number of direct workers Total number of workers Floor space (square feet) Machine running hours Machine power rating (kilowatts) 2 30 55,000 2,000 34 2,400 0 27,000 4,000 2 15 1,00 25 8,000 1,000 2 10 1,000 10 1 85 8,000 125 105,000 (a) Machine hour overhead absorption rate for each of the four groups of machines. (9 marks) (b) The overhead cost to be absorbed by product XY123 if: (i) It utilizes the following time resources of the indicated machine groups: Hours 8 3 Machine group A B
1 4 C D (ii) (3 marks) Direct labour cost is 22,000,000 and the direct wages percentage method is used. (3 marks) (c) Briefly discuss the argument in favour of changing the overhead absorption rate from direct wages percentage in machine hour rate. (5 marks) QUESTION TWO Nguvu Company Limited specializes in the manufacture of industrial adhesives. The adhesive is made from a solution of chemical powder X and liquid chemical Y. After manufacturing the adhesive, the company packs in into plastic tubes before distributing it to the customers. The standard prime cost of a tube of the adhesive is as follows: Materials: Powder X Liquid chemical Y Plastic tube Direct labour: Mixing and pouring Total standard prime cost Industrial adhesive per tube 15 3 per tube 24 18 42 The standard material allowance for each tube of the adhesive is 2kg of chemical powder X, ¼ litre of liquid chemical Y and one piece of plastic tube. The standard wage rate of mixing and pouring the chemicals is 45 per hour. During the month ended 31 March 2003. 45,000 tubes of the adhesive were made. There was no work in progress at the beginning or end of the month and the receipts and issues of materials during the month were as shown below: Opening Stock Purchases Issues Powder Liquid Plastic Chemical X Chemical Y tube kg 100,000kg @ 7 per kg 98,000 kg 2,000 litres,000 litres @ 23 per litre,000 litre @ 25 per litre 10,500 litres 1,000 tubes 2,000 tubes @ 4 each 50,000 tubes @ 3 each 45,200 tubes Employees working on the mixing and pouring of the chemicals worked a total of 2,050 hours during the month ended 31 March 2003. They were paid gross wages amounting to 8,9. It is the policy of the company to analyze variances from the standard prime costs. (a) Materials price variance ( marks) (b) Materials usage variance ( marks)
(c) Direct labour efficiency variance (2 marks) (d) Direct wages rate variance (2 marks) (e) (i) Two possible causes of direct labour efficiency variance (2 marks) (ii) Two possible causes of direct material usage variance (2 marks) QUESTION THREE Maxim Company Limited started its operations on 1 January 2001. It manufactures a single product which it sells at 25 per unit. The following absorption costing income statements are for the years ended 31 December 2001 and 31 December 2002 respectively. Sales Cost of goods sold: Opening stock Cost of goods manufactured Cost of goods available for sale Less: Closing stock Cost of goods sold Gross margin Marketing and administrative costs Operating income before tax 000 000 150,000 350,000 52,000 78,000 72,000 39,500 32,500 52,000 182,000 182,000 18,000 49,500 118,500 The cost of goods manufactured per unit is computed as follows: Direct Materials 5,000 Direct labour Variable manufacturing overhead 2,000 Fixed manufacturing overhead Total cost per unit 1 Production and sales data for the two years are as follows: Units produced Units sold,000 14,000 Marketing and administrative costs: Variable marketing costs Fixed marketing costs Fixed administrative costs 7,500 17,000 39,500 17,500 17,000 49,500 There was no work in progress at either the beginning or end of the respective years. (a) Income statements for Maxim Company Limited for each of the years using the variable costing method. (10 marks) (b) Reconcile the absorption-costing and variable-costing operation incomes for each of the two years. ( marks) (c) Which income statement format is more suitable for managerial decision making?
QUESTION FOUR Mali Yote Limited is a company engaged in the manufacture of specialist marine engines. It operates a job costing accounting system which is not integrated with financial accounts. At the beginning of the month of May 2002, the operating balances in the cost ledger were as follows: Stores ledger control account 85,000 Work in progress control account 17,000 Finished goods control account 49,000 Cost ledger control account 302,000 During the month, the following transactions took place. Materials: Purchases Issues to: Production General maintenance Assembling of manufacturing equipment Factory wages: Total wages paid 42,700 3,400 1,400 7,00 124,000 Of the total wages paid. 12,500,000 was incurred in the assembly of manufacturing equipment. 35,700,000 was indirect wages and the balance was direct wages. Other production overhead costs incurred amounted to 152,000,000. 30,000,000 of which was absorbed by the manufacturing equipment under assembly while 7,500,000 was under absorbed overhead costs written off. One of the engines manufactured by the company is produced under licence. During the month of May 2002. 2,100,000 was paid as royalty for that particular engine. Selling overheads and distribution overhead costs were as follows: Selling overheads Distribution overheads 22,000 4 The company s gross profit margin is 25% on factory cost. At the end of May 2002, the stock of work in progress had increased by 12,000,000. The manufacturing equipment under assembly was completed within the month and transferred out of the cost ledger at the end of the month. (i) Cost ledger control account (8 marks) (ii) Stores ledger control account (3 marks) (iii) Work in progress control account (3 marks) (iv) Finished goods control account (3 marks) (v) Costing profit and loss account (3 marks)
QUESTION FIVE (a) Although stocks of materials may be planned to maximize profitability, when stock record cards are compared to actual physical stocks, differences often arise. Explain possible reasons for these differences. (b) Using a diagram to illustrate your answer, explain the rationale underlying the economic order quantity model. (The mathematical derivation is not required) (c) Explain briefly the limitations of economic order quantity. (d) Bidii Enterprises is located at Kariobangi Light Industries area in Nairobi. The company manufactures a product Comex which is used in the building industry. The main raw material used in the manufacture of Comex is material B42000. The following information relates to material B42000. Annual requirements: Ordering costs: Annual holding costs: Purchase price per unit: Safety stock requirement: 144,000 units 12,500 per order 20% of the purchase price 500 None (i) The economic order quantity. (2 marks) (ii) The number of orders needed per year. (2 marks) (iii) Total cost of ordering and holding material B42000 per year. QUESTION SIX SECTION II Distinguish between continuous stocktaking and annual stocktaking and explain the advantages and disadvantages of each of them. (20 marks) QUESTION SEVEN Write explanatory notes on each of the following: (a) Just-In-Time (JIT) production. (b) Equivalent units in process costing (3 marks) (c) Activity based costing (d) Learning curve theory. (3 marks) (e) Set-up time (3 marks) (f) Product costing (3 marks)