LCCI International Qualifications

Cost Accounting
Level 3

Model Answers
Series 4 2008 (3017)

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Cost Accounting Level 3
Series 4 2008

How to use this booklet

Model Answers have been developed by EDI to offer additional information and guidance to Centres,
teachers and candidates as they prepare for LCCI International Qualifications. The contents of this
booklet are divided into 3 elements:

(1) Questions – reproduced from the printed examination paper

(2) Model Answers – summary of the main points that the Chief Examiner expected to
see in the answers to each question in the examination paper,
plus a fully worked example or sample answer (where applicable)

(3) Helpful Hints – where appropriate, additional guidance relating to individual

questions or to examination technique

Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success.

EDI provides Model Answers to help candidates gain a general understanding of the standard
required. The general standard of model answers is one that would achieve a Distinction grade. EDI
accepts that candidates may offer other answers that could be equally valid.

© EDI 2009

All rights reserved; no part of this publication may be reproduced, stored in a retrieval system or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise
without prior written permission of the Publisher. The book may not be lent, resold, hired out or
otherwise disposed of by way of trade in any form of binding or cover, other than that in which it is
published, without the prior consent of the Publisher.
QUESTION 1

Twist and Turn manufactures and sells its single product at £16 per unit. The company, which
currently has a monthly production capacity of 5,000 units, has orders for and plans to sell, 4,500 units
in the next month. The following information is available:

Total monthly costs, for production and sales of 4,500 units and 5,000 units are estimated at £48,000
and £51,000 respectively.

The company only manufactures to sales orders received and keeps no stock.

REQUIRED

(a) Calculate for next month the estimated:

(i) Contribution sales ratio

(ii) Break even point (in units and revenue)
(iii) Margin of safety as a % of sales
(iv) Net profit.
(11 marks)

A mail order company has approached Twist and Turn with the following two order options

(i) 500 units at a price of £15 each

or
(ii) 1,000 units at a price of £14 each.

This is in addition to the sales orders already received by Twist and Turn and must be completed
during next month’s production. Twist and Turn can increase its monthly manufacturing capacity to
5,500 units by hiring additional equipment at a cost of £2,500 per month. No changes in variable
costs are expected.

REQUIRED

(b) Advise Twist and Turn, using supporting calculations, whether either of the mail order options
should be accepted.
(6 marks)

(c) State three assumptions in cost-volume-profit analysis. (3 marks)

(Total 20 marks)

3017/4/08/MA Page 1 of 14
MODEL ANSWER TO QUESTION 1

(a) (i) Contribution sales ratio

Variable cost per unit

Total costs = Fixed costs + Variable costs
£51,000 = Fixed costs + 5,000 x Variable cost per unit
£48,000 = Fixed costs + 4,500 x Variable cost per unit
£3,000 = 500 x Variable cost per unit
Variable cost per unit = £3,000/500
Variable cost per unit = £6
Contribution £16 - £6 = £10
Contribution Sales Ratio = 10/16 x 100%
= 62.50%

(ii) Break even point

Break even point = Fixed costs/Unit contribution

= £21,000/£10
= 2,100 units
Break even point = Fixed costs/Contribution sales ratio
= £21,000/0.625
= £33,600

Workings:

£51,000 = Fixed costs + 5,000 x £6

Fixed costs = 51,000 – 30,000
Fixed costs = £21,000

(iii) Margin of safety

Margin of safety = Budgeted sales – Break even point

= 4,500 – 2,100
= 2,400 units
% of sales = (2,400/4,500) x 100%
= 53.3%

(iv) Net profit

Net profit = Total contribution – Fixed costs

= 4,500 x £10 - £21,000
= £24,000

3017/4/08/MA Page 2 of 14
MODEL ANSWER TO QUESTION 1 CONTINUED

(b) Order option (i)

Additional contribution (net profit) = 500 x (£15 - £6)
Additional net profit = £4,500

Order option (ii)

Additional contribution = 1,000 x (£14 - £6)
= £8,000
Additional fixed costs = £2,500
Additional net profit = £8,000 - £2,500
= £5,500

Advice
Advise company to accept option (ii) as this option will generate £1,000 more profit than option (i).

(c) Assumptions in cost-volume-profit analysis

Three of the following:

Selling price per unit is constant across the range of activity

Total fixed costs remain constant across the range of activity
Variable costs per unit is constant across the range of activity
Costs can be split between fixed and variable.

3017/4/08/MA Page 3 of 14
QUESTION 2

A company produces a single product. The company uses standard costing and has produced the
following budgeted and actual Manufacturing and Trading accounts for a period.

Budgeted Manufacturing and Trading Account

Sales and production units 225
£ £
Sales 9,000
Variable costs 3,600
Fixed overheads 2,700
Standard costs 6,300
Gross profit 2,700

Actual Manufacturing and Trading Account

Sales and production units 200
£ £
Sales 8,400
Variable costs 3,000
Fixed overheads 2,800
Actual cost 5,800
Gross profit 2,600

The following information has also been provided:

Fixed overheads are absorbed at a predetermined rate based on direct labour hours.
Standard direct labour is 2 hours per unit.
Actual direct labour worked was 470 hours.

REQUIRED

(a) Calculate the following variances for the period:

(i) sales price

(ii) sales volume (profit)
(iii) total cost.
(6 marks)

(b) Reconcile the budgeted gross profit with the actual gross profit using the variances calculated in
part (a).
(3 marks)

(c) Calculate the following fixed overhead variances for the period:

(i) expenditure
(ii) volume
(iii) capacity
(iv) efficiency.
(8 marks)

(d) Explain the difference between an ideal and an attainable standard. (3 marks)

(Total 20 marks)

3017/4/08/MA Page 4 of 14
MODEL ANSWER TO QUESTION 2

(a) Sales and cost variances

(i) Sales price variance (200 x £40) - £8,400 400F

(ii) Sales volume (profit) variance (225 x 12) – (200 x 12) 300A
(iii) Total cost variance (200 x 28) – 5,800 200A

Workings:

Budgeted standard price per unit £9,000/225 = £40

Budgeted standard profit per unit £2,700/225 = £12
Budgeted standard cost per unit £6,300/225 = £28

(b) Profit reconciliation £

Budgeted profit 2,700

Sales price variance 400F
Sales volume (profit variance) 300A
Total cost variance 200A 100A
Actual profit 2,600

(c) Fixed overhead variance

(i) Expenditure variance £2,800 - £2,700 100A

(ii) Volume variance £2,700 – (200 x 2 x 6) 300A
(iii) Volume capacity variance (225 x 2 – 470) x £6 120F
(iv) Volume efficiency variance (200 x 2 – 470) x £6 420A

Workings:

Overhead absorption rate = £2,700/(225 x 2) = £6 per direct labour hour

(d) Ideal standard

A standard which makes no allowance for normal loss, waste and machine down time and
therefore only attainable under most favourable conditions.

Attainable standard

Standards set at a level which assumes efficient levels of operation but includes allowances for
normal loss, waste and machine down time.

3017/4/08/MA Page 5 of 14
QUESTION 3

Sole Product Ltd manufactures and sells a single product. The product is produced in two
departments (machining and finishing) before being packed into boxes in the dispatch department.
The company has provided the following budgeted information.

Direct material £2.50 per product

Direct labour
Machining department (per 100 units) at £8.00 per hour 5 hours
Finishing department (per 20 units) at £10.00 per hour 4 hours
Dispatch department labour (per 20 units packed) at £8.00 per hour 1 hour
Packing boxes £0.50 each

Fixed overheads (if absorption costing is applied)

Machining department Absorbed at a rate of £15 per machine hour

(The manufacture of a batch of 100 units takes 4 machine hours)
Finishing department Absorbed at a rate of £12 per direct labour hour
Dispatch department Absorbed at a rate of £1 per product packed

The selling price is £20 per unit.

Planned production and sales for the next period are as follows:

Production 2,000 units

Sales 1,500 units

There is no stock of packed or unpacked products, direct material or packing boxes at the beginning of
the period.

At the end of the period it is expected to have no stock of packing boxes and 400 units unpacked in
the dispatch department.

All other production in the period will be packed.

REQUIRED

Produce budgeted manufacturing and trading account for the period using:

(a) Absorption Costing. (13 marks)

(b) Marginal Costing. (7 marks)

(Total 20 marks)

3017/4/08/MA Page 6 of 14
MODEL ANSWER TO QUESTION 3

(a) Number of products

Production for period 2,000
Sales for period 1,500
Closing stock of unpacked products 400
Closing stock of packed products 100

Products completed and packed in period (1,500 + 100) 1,600

Budgeted Manufacturing and Trading Account for the period (Absorption Costing)
£ £ £
Sales (1,500 x £20) 30,000
Direct material (2,000 x £2.50) 5,000
Direct labour – Machine dept (2,000/100 x £8 x 5) 800
– Finishing dept (2,000/20 x £10 x 4) 4,000
Labour – dispatch dept (1,600/20 x £8) 640
Material – Packing boxes (1,600 x £0.50) 800 11,240
Fixed overheads
Machine dept (2,000/100 x £15 x 4) 1,200
Finishing dept (2,000/20 x £12 x 4) 4,800
Dispatch dept (1,600 x £1) 1,600 7,600
18,840
Less closing stock of work in progress (unpacked products) 3,160
Manufacturing cost of products completed 15,680
Less closing stock of completed products 980
Manufacturing cost of sales 14,700
Gross profit 15,300

Workings:

Closing stock of work in progress

= [(5,000 + 800 + 4,000 + 1,200 + 4,800)/2,000] x 400
= £3,160

Closing stock of completed products

= (15,680/1,600) x 100
= £980

3017/4/08/MA Page 7 of 14
MODEL ANSWER TO QUESTION 3 CONTINUED

(b) Budgeted Manufacturing and Trading Account for the period (Marginal Costing)
£ £ £
Sales 30,000
Direct material 5,000
Direct labour – Machine dept 800
– Finishing dept 4,000
Labour – dispatch dept 640
Material – Packing boxes 800
Variable cost of production 11,240
Less closing stock of work in progress (unpacked products) 1,960
9,280
Less closing stock of completed products 580
Variable production cost of sales 8,700
Contribution 21,300
Less Fixed overheads 7,600
Gross profit 13,700

Workings:

Closing stock of work in progress

= [(5,000 + 800 + 4,000)/2,000] x 400
= £1,960

Closing stock of completed products

= (9,280/1,600) x 100
= £580

3017/4/08/MA Page 8 of 14
QUESTION 4

A haulage company, which operates a fleet of 10 similar heavy goods vehicles and employs 10
drivers, has prepared the following monthly flexible budget based on the number of contracted jobs.

Number of contracts 160 180 200 220

km km km km
Vehicle travel (contracted to customer) 32,000 36,000 40,000 44,000
Vehicle travel (not contracted to customer) 24,000 27,000 30,000 33,000
£ £ £ £
Income from customers 70,400 79,200 88,000 96,800
Fuel costs 11,200 12,600 14,000 15,400
Driver wages 13,400 14,450 15,500 16,550
Vehicle maintenance 4,000 4,000 8,000 8,000
Office costs 2,280 2,440 2,600 2,760
Other operational costs 10,000 10,000 10,000 10,000

Income from customers is generated by charging a rate per km proportional to the contracted distance
travelled.

Drivers are paid a fixed wage plus a variable wage proportional to the total vehicle distanced travelled.

Office costs are partly related to the number of contracts completed.

During Month 1 the following actual data was recorded:

Number of contracts jobs 204

km
Vehicle travel (contracted to customers) 42,000
Vehicle travel (not contracted) 30,000
£
Income from customers 90,860
Fuel costs 14,780
Driver wages 15,110
Vehicle maintenance 7,500
Office costs 2,740
Other operational costs 9,800

REQUIRED

(a) Prepare a statement for Month 1 showing for each budgeted item the following:

(i) the flexed budget

(ii) the actual budget
(iii) the variance.
(16 marks)

(b) Briefly explain the main difference between flexible and fixed budgets.
(4 marks)

(Total 20 marks)

3017/4/08/MA Page 9 of 14
MODEL ANSWER TO QUESTION 4

(a) A Haulage company – Budget Report – Month 1

(Based on 204 contracted jobs)
Flexed Actual Variance
Km km Km
Vehicle travel (contracted to customers) 40,800 42,000 1,200A
Vehicle travel (not contracted to customers) 30,600 30,000 600F
£ £ £
Income from customers 89,760 90,860 1,100F
Fuel costs 14,280 14,780 500A
Drivers’ wages 15,710 15,110 600F
Vehicle maintenance 8,000 7,500 500F
Office costs 2,632 2,740 108A
Other operational costs 10,000 9,800 200F

3017/4/08/MA Page 10 of 14
MODEL ANSWER TO QUESTION 4 CONTINUED

Workings:

Vehicle travel (contracted to customers)

(Variable)
32,000 budgeted km for 160 contracts = 32,000/160 = 200km per contract
204 contracts = 204 x 200 = 40,800km

Vehicle travel (not contracted to customers)

(Variable)
24,000 budgeted km for 160 contracts = 24,000/160 = 150km per contract
204 contracts = 204 x 150 = 30,600km

Income from customers

(Variable)
£70,400 budgeted for 32,000km travel = 70,400/32,000 = £2.20 per km
204 contracts = 204 x 200 x £2.20 = £89,760

Fuel costs
(Variable cost)
Contracts Total distance traveled (km) Cost per km (£)
160 32,000 + 24,000 = 56,000 11,200/56,000 = £0.20 per km
Vehicle travel for 204 contracts = 40,800 + 30,600 = 71,400km
Fuel cost = 71,400 x £0.20 = £14,280

Drivers wages
(Semi-variable cost)
Variable wage cost
Over contract range 160:180 = (14,450 – 13,400)/(63,000 – 56,000) = £0.15 per km
Total wage = Fixed wage + (Total variable wage
per km travelled)
Using 220 contracted jobs per month
16,550 = Fixed wage + (0.15 x 77,000)
Fixed wage = 16,550 – 11,550 = £5,000
Total wage = £5,000 + 0.15 x vehicle travel
204 contracts = 5,000 + 71,400 x 0.15 = £15,710

Office costs
(Semi-variable cost)
Variable cost
Over contract range 160:180 = (1,140 – 1,280)/(180 – 160) = £8 per contract
Total cost = Fixed cost + (Total variable wage
per contract)
Using 200 contracted jobs per month
2,600 = Fixed cost + (8 x 200)
Fixed cost = 2,600 - 1,600 = £1,000
Total cost = £1,000 + £8 per contract
204 contracts = 1,000 + 204 x 8 = £2,632

(b) A fixed budget is normally set prior to the start of an accounting period and used for planning
purposes. It is based on one level of activity.

A flexible budget, used for control purposes, changes in response to changes in activity by
recognising different cost behaviour patterns.

3017/4/08/MA Page 11 of 14
QUESTION 5

Makeit Ltd maintains a cost ledger which is kept separate to the financial ledger. At the beginning of
month 2 the following balances remained in the cost ledger.

£000 £000
Raw material Account 70
Finished Goods Control Account 90
Work in Progress Control Account 60
Production Overhead Control Account (over absorbed) 5
Financial Ledger Control Account 215
220 220

During Month 2, the following transactions took place:

£000
Raw material purchases 110
Total factory wages 100
Indirect production expenses 75
Sales 400

At the end of Month 2, the following stocks, valued at cost, were recorded:

Raw materials £60,000

Work in progress £57,000
Finished goods £110,000

Notes

(i) 10% of raw material issues from stores are indirect

(ii) 90% of factory wages are direct labour
(iii) Factory overheads are absorbed at the rate of 110% of the direct labour wages.

REQUIRED

(a) Record the above transactions in the cost ledger accounts for month 2. (16 marks)

(b) Distinguish between integrated and non-integrated accounting systems. (4 marks)

(Total 20 marks)

3017/4/08/MA Page 12 of 14
MODEL ANSWER TO QUESTION 5

(a)
Raw Material Control Account
£000 £000
Opening Balance 70 W in P Control 108
Fin Led Control 110 Prod Overhead Cont 12
Closing Balance 60
180 180
Workings:
Material issued (180 - 60) = 120, 10% indirect = 12 and 90% direct = 108

Wages Control Account

£000 £000
Fin Led Control 100 W in P Control 90
Prod Overhead Cont 10
100 100

Production Overhead Control Account

£000 £000
Raw Mat Control 12 Opening Balance 5
Wages Control 10 W in P Control 99
Fin Led Control 75
Closing Balance 7
104 104

Work in Progress Control Account

£000 £000
Opening Balance 60 Fin Goods Control 300
Raw Mat Control 108 Closing Balance 57
Wages Control 90
Prod Overhead Control 99
357 357
Workings:
Work completed at cost (357 - 57) = 300

Finished Goods Control Account

£000 £000
Opening Balance 90 Prod Cost of Sales 280
W in P Control 300 Closing Balance 110
390 390
Workings:
Production cost of sales (390 - 110) = 280

3017/4/08/MA Page 13 of 14
MODEL ANSWER TO QUESTION 5 CONTINUED

Production Cost of Sales Account

£000 £000
Fin Goods Control 280 Profit/Loss 280
280 280

Sales Account
£000 £000
Profit/Loss 400 Fin Led Control 400
400 400

Financial Ledger Control Account

Sales 400 Opening Balance 215
Closing Balance 220 Raw Mat Control 110
Wages Control 100
Prod Overhead Control 75
Profit 120
620 620
Workings
Profit (400 - 280) = 120

(b) Integrated accounts – a set of accounting records which provide both financial and cost accounts
using common data.

Non-integrated accounts – a system in which the cost accounts are distinct from the financial
accounts, the two sets of accounts being kept in agreement by use of control accounts or
reconciled by other means.

3017/4/08/MA Page 14 of 14 © Education Development International plc 2009

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