CATHOLIC UNIVERSITY OF ZIMBABWE
FACULTY OF COMMERCE, INNOVATION AND TECHNOLOGY
BACHELOR OF ACCOUNTING (HONORS) DEGREE
COST ACCOUNTING AND CONTROL 1
DATE: DECEMBER 2023 TIME: 3 HOURS
INSTRUCTIONS TO CANDIDATES
1. Answer ALL 4 (four) questions
2. Each question carries 25 Marks
3. The marks for each question are indicated in square [] brackets.
QUESTION ONE [25 MARKS]
a. Direct costs are those costs which can be traced to a cost objective. If the cost
objective is a sales territory, then fixed salaries of salesmen will be a direct cost.
Therefore, the statement is incorrect.
(ii) Whether a cost is controllable depends on the level of authority and time span being
considered. For example, a departmental foreman may have no control over the number of
supervisors employed in his department but this decision may be made by his superior. In the
long term such costs are controllable.
(iii) This statement is correct-sunk costs. Sunk costs are historical or past costs. These are the
costs, which have been created by a decision that was made in the past and cannot be changed
by any decision that will be made in the future. Investments in plant and machinery, buildings
etc. are prime examples of such costs. Since sunk costs cannot be altered by decisions made
at the later stage, they are irrelevant for decision-making.
b. Role of a cost accountant
the cost accountant provides financial information for stock valuation purposes and
also presents relevant information to management for decision-making and planning
and cost control purposes.
For example, the cost accountant provides information on the costs and revenues of
alternative courses of action to assist management in selecting the course of action
which will maximize future cash flows.
By coordinating plans together in the form of budgets and comparing actual
performance with plans the accountant can pinpoint those activities which are not
proceeding according to plan.
c. i. Avoidable costs are those which will be eliminated if a segment of a business (e.g.,
a product or department) with which they are directly related is discontinued.
Unavoidable costs are those which will not be eliminated with the segment. Such
costs are merely reallocated if the segment is discontinued. For example, in case a
product is discontinued, the salary of a factory manager or factory rent cannot be
eliminated. It will simply mean that certain other products will have to absorb a large
amount of such overheads. However, the salary of people attached to a product or the
bad debts traceable to a product would be eliminated. Certain costs are partly
avoidable and partly unavoidable. For example, closing of one department of a store
might result in decrease in delivery expenses but not in their altogether elimination. It
is to be noted that only avoidable costs are relevant for deciding whether to continue
or eliminate a segment of a business.
ii. Cost reduction and cost control: Cost reduction and cost control are two different
concepts. Cost control is achieving the cost target as its objective whereas cost reduction is
directed to explore the possibilities of improving the targets. Thus, cost control ends when
targets are achieved whereas cost reduction has no visible end. It is a continuous process.
QUESTION TWO [25 MARKS]
Production centres Service centres
Item Basis Machine X Machine Y Assembly Procurement General
factory
Indirect Direct 1 000 000 1 000 000 1 500 000 1 100 000 1 480 000
wages
Indirect Direct 500 000 805 000 105 000 10 000
materials
Lighting Area 100 000 50 000 150 000 150 000 50 000
and heating
Property Area 200 000 100 000 300 000 300 000 100 000
taxes
Insurance Book value 80 000 50 000 10 000 5 000 5 000
Depn B. Value 800 000 500 000 100 000 50 000 50 000
Insurance Area 50 000 25 000 75 000 75 000 25 000
Of Buildings
Salaries Employees 240 000 160 000 240 000 80 000 80 000
Step 1 2 970 000 2 690 000 1 760 000 1 800 0000
Reallocation of
service centre
costs
Materials Value of
Materials issued 880 000 660 000 220 000 1 760 000
General DL
Support 450 000 450 000 900 000 1 800 000
Step 2 of
stage 2 4 300 000 3 800 000 3 600 000 — —
Machine hours and
direct labour hours 2 000 000 1 000 000 2 000 000
Machine hour
overhead rate
Step 3 $2.15 $3.80
Direct labour hour
overhead rate
Step 3 $1.80
b. These service centres render essential services that support the production process, but
they do not deal directly with the products. Therefore, it is not possible to allocate
service centre costs to products passing through these centres. Nevertheless, the costs
of providing support services are part of the total product costs and therefore should
be assigned to products. To assign costs to products traditional costing systems
reallocate service centre costs to production centres that actually work on the product.
The method that is chosen to allocate service centre costs to production centre should
be related to the benefits that the production centres derive from the service rendered.
However, it is questionable whether arbitrary apportionments of fixed overhead costs
provides useful information for decision-making. Such apportionments are made to
meet stock valuation requirements, and they are inappropriate for decision-making,
cost control and performance reporting.
An alternative treatment would be to adopt a variable costing system and treat fixed
overheads as period costs. This would eliminate the need to reapportion service
department fixed costs. A more recent suggestion is to trace support/service
department costs to products using an activity-based costing system (ABCS).
QUESTION THREE [25 MARKS]
a. FIFO method
This method assumes that the first materials purchased are the first to be issued to
production. Material in stock will always be those purchased last. Usage values
should follow a sequence of purchase prices. It works like how you maintain your
fridge at home.
Advantages
1. The closing inventory of materials will be very close to the current market
price.
2. Material cost charged to production represents the actual cost with which the
cost of production should have been charged.
3. It is an actual cost system
4. It’s a logical pricing method, which represents what is happening (the oldest
stock is likely to be used first).
Disadvantages
1. If prices fluctuate frequently, this method may lead to clerical error.
2. Since each issue of material to production is related to a specific purchase
price, the costs charged to the same job are likely to show a variation from
time to time.
3. Materials are charged at old prices resulting in production being undercharged
(products costs are understated and profits overstated).
4. This method does not permit comparisons of similar jobs.
5. FIFO can be cumbersome to operate because of the need to identify each batch
of material separately.
WEIGHTED AVERAGE COST
It is applied by valuing each stock issue at the weighted average cost of the units
remaining in stock immediately before the issue. In other words it’s a perpetual
weighted average system were the issue price is calculated after each receipt
taking into account both quantities and money value.
Advantages
1. It is acceptable for tax purposes and recommended for accounting purposes.
2. Fluctuations in prices are smoothed out making it easier to use the data for decision
making
3. It is less complicated to administer than LIFO and FIFO
4. Comparisons are made easier
5. During inflationary periods gives better results.
6. No unrealized stock profits or losses
Disadvantages
1. Although realistic it is not an actual buying in price.
2. The resulting issue price is rarely an actual price that has been paid and can run to
several decimal places.
3. Prices tend to lag a little behind current market values when there is gradual inflation.
b. Stores ledger card – FIFO method
Receipts Issues Balance
Date Qty Price Value Qty Price Value Qty
Value
1 April 40 400
4 April 140 11 1540 180
1 940
10 April 40 10 400
50 11 550
90 950 90 990
12 April 60 12 720 150
1 710
13 April 90 11 990
10 12 120
100 1 110 50 600
16 April 200 10 2 000 250 2
600
21 April 50 12 600
20 10 200 180 1 800
70 800
23 April 80 10 800 100 1 000
26 April 50 12 600 150 1
600
29 April 60 10 600 90 1 000
ii. Cost of material used in April: FIFO" $4 350
c.
QUESTION FOUR [25 MARKS]
(a) Marginal Costing
Profit Statements Using Marginal Costing
January February March
April
Units $ Units $ Units $ Units
$
Sales @ $20 400 8,000 500 10,000 1,400 28,000 1,700
34,000
less
Cost of sales:
Opening stock @ $6 – – 600 3,600 1,100 6,600 700
4,200
Variable production
cost @ $6 1,000 6,000 1,000 6,000 1,000 6,000 1,000
6,000
less
Closing stock @ $6 600 3,600 1,100 6,600 700 4,200 –
–
400 2,400 500 3,000 1,400 8,400 1,700
10,200
Contribution 5,600 7,000 19,600
23,800
less
Fixed overheads:
Production 5,000 5,000 5,000
5,000
Selling and admin 3,000 3,000 3,000
3,000
Profit/(Loss) (2,400) (1,000) 11,600
15,800
Total profit for the four months = $24,000
(b) Absorption Costing
Fixed production overhead absorption rate = 5000
1000
= $5 per unit
Therefore, full production cost = £5 + £6 variable cost per unit
= £11 per unit
Note that there will be no over- or under-absorption of fixed production overheads because
the production for every month is equal to the normal capacity of 1,000 unit
Profit Statements Using Absorption Costing
January February March April
Units $ Units $ Units $ Units $
Sales @ $20 400 8,000 500 10,000 1,400 28,000 1,700 34,000
less
Cost of sales:
Opening stock @ $11 – – 600 6,600 1,100 12,100 700 7,700
Full production cost
@ $11 1,000 11,000 1,000 11,000 1,000 11,000 1,000 11,000
1,000 11,000 1,600 17,600 2,100 23,100 1,700 18,700
less
Closing stock @ $11 600 6,600 1,100 12,100 700 7,700 – –
400 4,400 500 5,500 1,400 15,400 1,700 18,700
Gross Profit 3,600 4,500 12,600 15,300
less Fixed overheads:
Selling and admin 3,000 3,000 3,000 3,000
Net Profit 600 1,500 9,600 12,300
Total profit for the four months = $24,000