MA QUESTIONS
- What is the correct entry in the cost ledger to record the over‐absorption of production overhead?
Debit credit
A. an over-absorbed production overhead a/c Production overhead a/c
B Over‐absorbed production overhead a/c Work‐in‐progress a/c
C. Production overhead a/c Over‐absorbed production overhead
D.Work‐in‐progress a/c Over‐absorbed production overhead
2. Which of the following statements describes cost centres?
A. Units of product or service for which costs are ascertained.
B. Amounts of expenditure attributable to various activities.
C. Functions or locations for which costs are ascertained and related to cost units.
D. A section of an organisation for which budgets are prepared and control exercised.
3. What does production overhead comprise of?
A. Variable overheads only.
B. Indirect labour, indirect material and indirect expenses related to production activity.
C. Indirect expenses only.
D. Indirect labour and material related to the production activity.
4. The following unit costs were incurred in producing 600 units of a product in April:
| Shs. per unit | |
| Variable costs | 30 |
| Semi‐variable costs | 32 |
| Fixed costs | 18 |
| Total costs | 80 |
75% of the semi‐variable costs are fixed costs. Production for May is budgeted to be 500 units.
The budgeted total Production costs for May are……….
5. A company uses the economic order quantity formula (EOQ) to establish its optimal re‐order quantity for its single raw material. The following data relates to the inventory costs:
Purchase price: Shs.15 per item
Carriage costs: Shs.50 per order (irrespective of order size) Ordering costs: Shs.5 per order
Storage costs: 10% of the purchase price plus Shs.0.20 per unit per annum Annual demand is 4,000 units.
What is the EOQ (to the nearest whole unit)?
A. 153 units
B. 170 units
C.485 units
D.509 units
6. 76. If a company wanted to ensure that its cost of production included the most recent cost for material, what would be the best inventory valuation method?
A periodic weighted average cost
B first‐in, first‐out (FIFO)
C cumulative weighted average cost
D last‐in, first‐out (LIFO)
7. Employee A is a carpenter and normally works 36 hours per week. The standard rate of pay is Shs.6.60 per hour. A premium of 50% of the basic hourly rate is paid for all overtime hours worked. During the last week of October, Employee A worked for 42 hours. The overtime hours worked were for the following reasons:
Machine breakdown 4 hours
To complete a special job at the request of the customer: 2 hours
How much of Employee A’s earnings for the last week of October would have been treated as direct wages?
A Shs.237.60
B Shs.257.40
C Shs.277.20
D Shs.283.80
8. Which of the following is NOT normally a reason for determining the absorption cost of a product?
A. To value inventory
B. To help in setting a selling price
C. To determine the difference with marginal costing
D. To help management better understand total costs
9. The store overhead in an engineering company for the budget period was Shs.82,100. It is to be re‐apportioned based on estimated requisitions to be issued in the period.
The business has four cost centres serviced by the store cost centre, and data relating to the budget shows:
| Cost centre | Estimated requisitions |
| Machining | 6,000 |
| Finishing | 6,500 |
| Packing | 3,200 |
| Maintenance | 1,200 |
The amount re‐apportioned to the Finishing cost centre would be
10. A company has two production departments, Cutting and Finishing.
The budgeted overheads and operating hours for the two departments for the next year are:
| Cutting | sh 210,000 | 60,000 machine hours | 4,000 labour hours |
| Finishing | sh 200,000 | 5,000 machine hours | 14,000 labour hours |
From the information given, the pre‐determined overhead absorption rates for the departments should be based on which basis? (Select one basis for each department.
| Machine hours | Labour hours | |
| Cutting department | ||
| Finishing department |
11. A company has put together a standard cost card for its single product as shown below. The budgeted monthly production is 2500 units.
| Selling price | sh 150 |
| Direct labour (5 hours @ Shs.10/hour) | sh 50 |
| Direct materials (6 litres @ Shs.5/litre) | sh 30 |
| Variable overhead (5 hours @ Shs.6 hour) | sh 30 |
| Fixed overhead | sh 15 |
| Profit | sh 25 |
The activity level in December was not the same as budgeted and the data from the cost card was used to recalculate the budgeted profit for the actual activity level using a marginal costing system. The flexed budget showed a profit of Shs.54, 500.
Actual costs in December were as budgeted except for materials which were 20% more expensive and variable overheads which were 30% cheaper.
Using a marginal costing system the actual profit for December would be?
12. A company uses marginal costing. In valuing inventory of finished goods which of the following would NOT be included in the valuation?
A.Machine operator’s wages
B.Factory rent
C.Royalty fees per unit
D.Raw materials
13. A company, which manufactures and sells a single product, has the following budgeted sales and production data for a period:
Production 2,200 units
Sales 2,000 units
The contribution per unit is Shs.15.
Fixed overheads per unit are Shs.10 (based on budgeted production).
What is the value of the absorption and marginal costing profits for the business?
| Shs.8,000 | Shs.10,000 | Shs.12,000 | Shs.13,000 | |
| Absorption costing profit | ||||
| Marginal costing profit |
14. Bay Agricultural Engineers is preparing a quote for Job 731. The costs and other related information are included.
Shs.
Raw materials 4,250
Direct labour 7,200
Production overhead Shs.5.50 per labour hour
Administrative overhead 10% of production cost
Profit margin 25% of selling price
Note: Direct labour is paid Shs.7.20 per hour.
The sales price of Job 731 to the customer would have been (round to the nearest Shs.)
15. A job cost estimate includes 630 productive labour hours. In addition, it is anticipated that idle time will be 10% of the total hours paid for the job. The wage rate is Shs.12 per hour.
What is the total estimated labour cost for the job?
A Shs.6, 804
B Shs.7, 560
C Shs.8, 316
D Shs.8, 400
16. Products A and B are manufactured in a joint process. The following data is available for a period:
| Joint process cost | Shs.30,000 | |
| Output: | Product A | 2,000 kg |
| Product B | 4,000 kg | |
| Selling price: | Product A | Shs,12 per kg |
| Product B | Shs.18 per kg |
What is Product B’s share of the joint process costs if the sales value method of cost apportionment is used?
A Shs.7, 500
B Shs.18, 000
C Shs.20, 000
D Shs.22,500
17. In a 30‐day period a restaurant was open for 9 hours per day. Costs incurred in the period totalled Shs.65,124. The following additional information is available:
| Number of tables available | 15 |
| Number of seats per table | 4 |
| Customer turnaround | 1 hour |
| Seating occupancy achieved | 60% |
The cost per customer was
18. A company has established the following information for the costs and revenues at an activity level of 500 units:
Shs.
Direct materials 2,500
Direct labour 5,000
Production overheads 1,000
Selling costs 1,250
…………
Total cost 9,750
Sales revenue 17,500
––––––
Profit 7,750
––––––
20% of the selling costs and 50% of the production overheads are fixed overall levels of activity.
The profit at an activity level of 1,000 units would be Shs.
19. Worth produces four products L, E, W and S which have the following costs per unit:
| L
Shs. |
E
Shs. |
W
Shs. |
S
Shs. |
|
| Direct materials (at Shs.10/kg) | 15 | 10 | 12.50 | 20 |
| Direct labour (at Shs.12/hour) | 12 | 12 | 18.00 | 18 |
| Overheads (at Shs.6 /labour hour) | 12 | 6 | 9.00 | 9 |
| –––– | –––– | ––––– | –––– | |
| Total cost | 39 | 28 | 39.50 | 47 |
| –––– | –––– | ––––– | –––– | |
| Contribution/unit | 10 | 15 | 12.00 | 20 |
| Maximum demand per month | 3,000 | 2,000 | 1,500 | 2,500 |
Only 15,000 kg of materials and 10,250 labour hours are available.
In order to maximise profits, the product that Worth would prefer to produce first is the product
20. Vincent is preparing a cash budget for July. His credit sales are as follows.
Shs.
| April (actual) | 40,000 |
| May (actual) | 30,000 |
| June (actual) | 20,000 |
| July (estimated) | 25,000 |
His recent debt collection experience has been as follows:
| Current month’s sales | 20% |
| Prior month’s sales | 60% |
| Sales two months prior | 10% |
| Cash discounts taken | 5% |
| Irrecoverable debts | 5% |
Vincent can expect to collect ………. from credit customers during July.
ANSWERS
1.
C
When production overhead is over-absorbed, the credit entry in the Production overhead
account for overheads absorbed is higher than the debit entries in the same account for
overhead expenditure incurred. The over‐absorbed overhead is therefore accounted for by:
. debiting Production overhead account;
. crediting Over‐absorbed overhead account.
2.
C
Marginal costing is used mainly for decision-making and is not a feature of financial accounting.
3.
B
An overhead cost is an indirect cost. Indirect overheads include indirect materials costs, indirect
labour costs and indirect expenses (for example, factory rental costs, machinery insurance
costs, machinery depreciation and so on).
4. The budgeted total production cost for May is Shs.44, 200
Fixed costs in the semi‐variable costs = 75% × Shs.32 = Shs.24
Fixed costs in April = 600 units × (Shs.18 + Shs.24) = Shs.25, 200 (these won’t
change in May as they are fixed.
Variable costs in the semi‐variable costs = 25% ×
Shs.32 = Shs.8 May variable costs = 500 units ×
(Shs.30 + Shs.8) = Shs.19,000 Total May costs =
25,200 + 19,000 = Shs.44,200
5. D
EOQ =509 units
6.
D
FIFO would charge production with the earliest costs. Using the weighted average method (whether
periodic or cumulative) would result in a mix of the earliest and latest costs.
7.
B
Idle time is an overhead cost. Unless overtime is worked specifically at the request of a
particular customer, the cost of any overtime premium is treated as a general production
overhead cost. However, when overtime is worked specifically for a customer, the overtime
premium is treated as a direct cost of the job.
Shs.
42 hours less 4 hours idle time = 38 hours
38 hours at the basic rate of pay (Shs.6.60) 250.80
Overtime premium for 2 hours (× 50% of 6.60) 6.60
––––––
Total direct wages cost 257.40
––––––
8.
C
2 × (50 + 5) × 4,000
(15 × 0.1) + 0.2
This is not a sound rationale for determining the absorption cost of a product (the organisation
may not even use marginal costing).
9. The amount re‐apportioned to the Finishing cost centre would be Shs.31,
577 Total requisitions = (6,000 + 6,500 + 3,200 + 1,200) = Shs.16, 900
Re‐apportionment rate per requisition = Shs.82,100/16,900 =
Shs.4.858
Re‐apportioned to Finishing cost centre = 6,500 requisitions × Shs.4.858 = Shs.31,577
10. C
| Machine hours | Labour hours | |
| Cutting department | 🗸 | |
| Finishing department | 🗸 |
Cutting is machine-intensive and finishing is labour-intensive so it is more accurate
to base overhead absorption rates on machine hours and labour hours respectively.
11. Using a marginal costing system the actual profit for December would be Shs.61, 400.
Flexed budget profit = (Actual production × Budget contribution per unit) – Budgeted fixed costs
Budget contribution per unit = (Shs.150 – Shs.110) = Shs.40 Budgeted fixed costs = 2,500 × Shs.15 = Shs.37, 500
Shs.54, 500 = (Actual production × Shs.40) – Shs.37, 500
Actual production = (Shs.54, 500 + Shs.37, 500)/ Shs.40 = 2,300 units Actual materials cost = Shs.5 × 1.2 = Shs.6 per litre
Actual variable overheads cost = Shs.6 × 0.7 = Shs.4.2
Actual contribution = (Shs.150 – Shs.50 – (6 × Shs.6) – (5 × Shs.4.2)) = Shs.43 Actual profit = (2,300 × Shs.43) – Shs.37, 500 = Shs.61, 400
12.
A
Machine operators’ wages, royalty fees and raw materials are all variable costs of production.
Factory rent is a fixed production overhead and would not be charged to inventory under
marginal costing.
13.
| Shs.8,000 | Shs.10,000 | Shs12,000 | Shs13,000 | |
| Absorption costing profit | 🗸 | |||
| Marginal costing profit | 🗸 |
14.
The sales price of Job 731 to the customer would have been Shs.24, 860
To answer this correctly, you need to identify that when the profit margin is 25% of
the sales price, this means that it is one‐third of the cost. (Selling price = 100%, profit
= 25%, so cost = 75% of sale. Therefore profit is 25/75 = 1/3 of cost.)
Shs.
Direct materials 4,250
Direct labour (1,000 hours) 7,200
Production overhead (1,000 hours × Shs.5.50) 5,500
––––––
Production cost 16,950
Administrative overhead (10%) 1,695
––––––
Total cost 18,645
Profit (1/3 of cost) 6,215
––––––
Sales price 24,860
––––––
15.
D.
Idle time is 10% of total hours so productive hours represent 90% of the total. ((630 ÷ 0.9 hours)
× Shs.12/hour) = Shs.8, 400
16.
C.
Normal loss = 25% of 3,500 units = 875 units. Value of normal loss (at Shs. 8 per unit) = Shs. 7,000.
Process account
| Units | Shs. | Units | Shs. | ||
| Materials | 3,500 | 52,000 | Normal loss | 875 | 7,000 |
| Labour | 9,625 | Output | 2,800 | ??? | |
| Abnormal gain | 175 | ??? | |||
| ––––– | ––––– | ||||
| 3,675 | 3,675 | ||||
| ––––– | ––––– |
Cost/unit =Shs(52,500 9,625 – 7,000) = Shs55,125 = Shs. 21
( 3500-875 ) 2,625
Valuation of output= Shs.21 ×2,800=Shs. 58,800
- The cost per customer was Shs.6.70.
There are 15 tables available with 4 seats each for 9 hours a day for 30 days in the month, so at 100% occupancy, there would be 16,200 customers (as each stays an hour). There is only 60% occupancy, so the cost per customer can be calculated by dividing the total cost by 16,200 × 0.6.
(Shs.65, 124 ÷ (30 × 9 × 15 × 4 × 0.6 customers)) = Shs.6.70
18. The profit at an activity level of 1,000 units would be Shs.16, 250
Shs
Direct materials 2,500
Direct labour 5,000
Variable production overhead (50% × 1,000) 500
Variable selling costs (80% × 1,250) 1,000
Total variable costs for 500 units 9,000
Sales revenue for 500 units 17,500
Total contribution for 500 units 8,500
Total contribution for 1,000 units (8,500 × 2) 17,000
Fixed production overhead (50% × 1,000) (500)
Fixed selling costs (20% × 1,250) (250)
––––––
Profit for 1,000 units of sale 16,250
––––––
- In order to maximise profits, the product that Worth would prefer to produce first is product E
Materials requirements for maximum demand
= (1.5 × 3,000) + (1 × 2,000) + (1.25 × 1,500) + (2 × 2,500)
= 13,375 kg of direct materials
There is enough material to meet maximum demand, so materials are not a limiting factor. Labour requirements for maximum demand
= (1 × 3,000) + (1 × 2,000) + (1.5 × 1,500) + (1.5 × 2,500) = 11,000 hours
Labour is a limiting factor since there are only 10,250 hours available.
| Product | L | E | W | S |
| Contribution per unit(Shs.) | 10 | 15 | 12 | 20 |
| Labour hours per unit | 1 | 1 | 1.5 | 1.5 |
| Contribution per labour hour(Shs.) | 10 | 15 | 8 | 13.33 |
Ranking 3rd‐ 1st 4th 2nd
20. Vincent can expect to collect Shs.20, 000 from credit customers during July.
Shs.
July’s sales Shs.25, 000 × 20% 5,000
June’s sales Shs.20, 000 × 60% 12,000
May’s sales Shs.30, 000 × 10% 3,000
20000