KENYA METHODIST UNIVERSITY

END OF 3rd TRIMESTER 2021 (PT) EXAMINATION

Question One

a) Explain four factors that affect stock levels in an organisation (8 Mrks)

The rate of inventory turnover: The rate of inventory turnover is the time period within which
inventory completes the cycle of production and sales. When the turnover rate is high,
investment in inventories tends to be low.

Types of product: Durable products are more susceptible to inventory holding as the risk of
perishability and obsolescence is less. Perishable and fashion goods are not stocked in large
amount. Thus, the type of product also influences the inventory level.

Economies of production runs: Economies of production run also determine the inventory
level. Modern machinery is very costly and the cost of idle machine time is considerable.
Therefore, every business firm likes to maintain sufficient stock of raw materials to ensure
uninterrupted production.

Costs: There are certain costs of carrying stock. Some of these costs (storage costs, setup costs,
change-over costs, ordering costs, spoilage and obsolescence costs) are directly measurable.

On the other hand, certain costs (opportunity costs, cost of capital costs caused by price level
changes, costs of loss of sales due to shortage of stock) are not measurable. All these costs
influence the level of inventories.

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b) Distinguish between cost accounting and financial Accounting. (6 Mrks)

Audience. Financial accounting involves the preparation of a standard set of reports for an
outside audience, which may include investors, creditors, credit rating agencies, and regulatory
agencies. Cost accounting involves the preparation of a broad range of reports that management
needs to run a business.

Format. The reports prepared under financial accounting are highly specific in their format and
content, as mandated by either generally accepted accounting principles or international financial
reporting standards. Cost accounting involves creating reports that can be in any format specified
by management, with the intention of including only that information pertinent to a specific
decision or situation.

Level of detail. Financial accounting primarily focuses on reporting the financial results and
financial position of an entire business entity. Cost accounting usually results in reports at a
much higher level of detail within the company, such as for individual products, product lines,
geographical areas, customers, or subsidiaries.

Product costs. Cost accounting compiles the cost of raw materials, work-in-process, and finished
goods inventory, while financial accounting incorporates this information into its financial
reports (primarily into the balance sheet).

Regulatory framework. The structure of financial accounting reports are tightly governed by
either generally accepted accounting principles or international financial reporting standards.
There is no regulatory framework governing cost accounting reports.
Report content. A financial report contains an aggregation of the financial information recorded
through the accounting system. The information in a cost accounting report can contain both
financial information and operational information. The operational information can come from a
variety of sources that are not under the direct control of the accounting department.

Report timing. Financial accounting personnel issue reports only at the end of a reporting period.
Cost accounting staff may issue reports at any time and with any degree of frequency, depending
upon management's need for the information.

Time horizon. Financial accounting is only concerned with reporting the results of reporting
periods that have already been completed. Cost accounting does this too, but also can be
involved in a variety of projections for future periods.

c) Distinguish between the following terminologies used in cost accounting.

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Controllable costs are those costs which can be, over a short term, subject to cost control through
management decisions. Non-controllable costs are those costs that cannot be altered, controlled
or impacted by management over a short time period.
ii) Product costs and period costs (3 Mrks)
Product costs are those directly related to the production of a product or service intended for sale.
Period costs are all other indirect costs that are incurred in production. Overhead and sales &
marketing expenses are common examples of period costs.

d) The following information was obtained from the records MOLO Enterprises for the year
2019.
Maximum consumption   9,000,000 units
Minimum consumption   6,000,000 units
Lead time       6-10 weeks
Re- order quantity   30,000,000 units

Required:

i) Reorder level (3 Mrks)

= Maximum rate of consumption × Maximum reorder period.

9,000,000 x 10 = 90,000,000

ii) Minimum stock level (3 Mrks)

Reorder level – (Average rate of consumption x Average reorder period)

90,000,000 – (7,500,000 x 8) = 30,000,000

iii) Maximum Stock level (3 Mrks)

(Reorder Level + Reorder Quantity) – (Minimum rate of consumption x Minimum reorder

(90,000,000 + 30,000,000) – (6 x 6,000,000) = 84,000,000

iv) Average stock level (1 Mrk)

(Maximum stock level + Minimum stock level) x 14 =

(84,000,000 + 30,000,000) x 14 = 1,596,000,000

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Question Two

The following information relates to an item XCstocked by KLIG Ltd for the month of
December 2020:
Receipts Issues
Date Units Units Unit cost (Sh)
Dec 1 3,400 30
4 3,000
6 2,200
11 2,500 28
18 2,000 26
24 2,200
27 2,600 32
31 1,800
The closing balance for November 2020 was a batch of 2,800 units received at a unit price of Sh
22.
Required:
a) Stores inventory record for the item XC for December 2020 under FIFO and weighted
average systems of stores issues. (18Mrks)

FIFO
receipt issue balance
date unit price total unit price total unit price total
balance       2800 22 61600
Dec-01 3400 30 102000    
Dec-04     2800 22 61600  
    200 30 6000 3200 30 96000
Dec-06     2200 30 66000 1000 30 30000
Dec-11 2500 28 70000   1000 30 30000
      2500 28 70000
Dec-18 2000 26 52000    
Dec-24     1000 30 30000  
    1200 28 33600 1300 28 36400
Dec-27 2600 32 83200 1300 28 36400  
Dec-31     500 32 16000 2100 32 67200
       
       
       
weighted average systems
receipt issue balance
date unit price total unit price total unit price total
balance       2800 22 61600

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 Dec-01 3400 30 102000   6200 26 161200
Dec-04     3000 26 78000 3200 26 83200
Dec-06     2200 26 57200 1000 26 26000
Dec-11 2500 28 70000   3500 27 94500
Dec-18 2000 26 52000   5500 26.5 145750
Dec-24     2200 26.5 58300 3300 26.5 87450
Dec-27 2600 32 83200 1800 26.5 47700 4100 29.25 119925

b) Closing stock Valuation under FIFO system. (2 Mrks)

Question Three
a) Describe at least two labour remuneration systems. (4 Mrks)

 Time or Day Rate System: This is the most common system found in practice. Under this
the worker is paid an hourly, daily, weekly or monthly rate of wages. Thus, his remunera-
tion depends upon the number of hours for which he is employed and not upon the
amount of his production.
 Straight Piece Work Rate System: This is an improvement on the Time Rate System.
Under this, a fixed rate of wage is paid for each piece or unit produced.
c) Explain the assumptions behind the determination of Economic Order Quantity (EOQ).
(6 Mrks)
The cost of the ordering remains constant.
The demand rate for the year is known and evenly spread throughout the year.
The lead time is not fluctuating (lead time is the latency time it takes a process to initiate and
complete).
No cash or settlement discounts are available, and the purchase price is constant for every item.
The optimal plan is calculated for only one product.
There is no delay in the replenishment of the stock, and the order is delivered in the quantity that
was demanded, i.e. in whole batch.
d) Chai LTD has three production departments and two service departments. The following is
their budgeted factory overheads for the year ended 30 December 2020
Shs. Shs.
Production departments

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 A 800,000
B 380,000
C 610,000 1790,000

Service departments X 196,000

The service department costs are to be re-apportioned as per the following percentages:
A B C X Y
X 20 30 30 - 20
Y 20 35 30 15 -

Required:
Re-apportion the service department costs to the production departments using repeated
distribution or continued allotment method (10 Mrks)

Question Five

a) In the context of budgetary control explain the main functions and importance of a
cash budget. (5 Mrks)

A cash budget is a quantitative expression of the cash flows (inflows and outflow) of a given
business entity for a defined period of time. It is used as a budgetary control measure to basically
ensure that the firm’s cash requirements are met in a timely manner and the firm’s cash flow is
healthy.

Importance of a cash budget:

 To reveal in advance point of cash shortages and surplus, so that cash sources and
investments can be arranged in advance.
 To ensure the cash flow of a firm is healthy, (there are no shortages).
 To allow management to consider the ways in which surpluses can be put into in advance.
 To enable management, formulate organizational policy e.g. credit policies when purchasing
inputs, payroll policy (when to pay wages and salaries and in what amounts etc)

8. Enables a safety cash level to be established to check uncertain cash outflows

a) You are in charge of making forecasts and preparing budgets. You have been
supplied with cost and revenue forecasts and details of payment as follows:
1. Forecast of revenue and costs for the quarter ending 31 March 2001

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 January February March
Shs. Shs. Shs.
Direct
Materials (purchases) 114,000 90,000 125,000
Wages 90,000 80,000 100,000
Overhead (ohs)
Production 44,000 42,000 50,000
Administration 22,000 20,000 27,000
Selling and distribution 17,000 15,000 19,000

Sales 370,000 360,000 430,000

2. Forecast of revenue and costs for the quarter ending 30 June 2020
April May June
Sh. Sh. Sh.
Direct
Materials (purchases) 80,000 57,000 89,000
Wages 72,000 54,000 63,000
Overhead
Production 35,000 26,000 35,000
Administration 22,000 25,000 27,000
Selling and distribution 13,000 11,000 16,000

Sales 360,000 370,000 380,000

Cash balance on 1 April 2020 Sh. 90,000

Other details
 Period of credit allowed by suppliers averages two months.
 A new machine is being installed at the end of March 2020 at a cost of Sh 100,000 and
payment is promised in early May 2020.
 Sales commission of 3% is payable within one month of sales.
 A dividend of Sh 100,000 is to be paid in June 2020.
 There is a delay of one month in the payment of overheads.
 Twenty per cent of the debtors pay cash, 70% of debtors pay within one month and the
other debtors pay within two months.

Required:
A cash budget on a monthly basis from the second quarter of the year 2020. (15Mrks)

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