Cost

Accounting
Level 3

Model Answers
Series 2 2008 (Code 3017)
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Cost Accounting Level 3
Series 2 2008

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Model Answers have been developed by Education Development International plc (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

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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

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Page 1 of 16
Page 2 of 16
Cost Accounting Level 3
Series 2 2008
QUESTION 1

Easy Travel Ltd is a transport company operating six passenger vehicles. The business, located in
rented premises, operates Type A and Type B vehicles and employs drivers contracted from an
agency on the basis of individual jobs.

At present, the company uses a traditional absorption costing system based on costs per vehicle/km.
to establish the costs of operation. Budgeted operational data for the next period, for each vehicle
type, is as follows:

Type A Type B
Agency driver costs (£) 10,400 20,000
Number of travelling passengers 5,600 3,600
Km per vehicle 11,000 12,500

The following additional information is provided for each vehicle type:

Vehicle data Type A Type B

Purchase price per vehicle (£) 60,000 20,000
Number of vehicles 2 4
Number of seats per vehicle 46 14

Budgeted operational overheads for the period, not including agency driver costs, are £36,000
absorbed on a rate per kilometre.

Further investigation has revealed the following activities and related operational overheads costs:

Activities Costs (£)

Servicing 1,728
Fuel 14,400
Vehicle cleaning 1,628
Vehicle insurance 2,600
Road fund licence 900
Depreciation 5,000
Administration 6,900
Rent 2,844
36,000

Other information
(i) Vehicle servicing is carried out regularly based on a predetermined number of kilometres
completed
(ii) Fuel costs are influenced by the number of kilometres completed
(iii) Cleaning costs are influenced by the number of seats on the vehicles
(iv) Vehicle insurance and depreciation are influenced by the purchase price of the vehicles
(v) Road fund licence costs are influenced by the number of vehicles in operation
(vi) Administration costs are influenced by the number of travelling passengers
(vii) Rent is influenced by the number of parking bays required. Each vehicle A requires two bays for
parking whereas each vehicle B only requires one.

3017/2/08/MA Page 3 of 16
QUESTION 1 CONTINUED

REQUIRED

Calculate the total budgeted average operational cost per vehicle for the period, for each type of
vehicle, using:
(a) Traditional absorption costing (6 marks)

(b) Activity based costing (14 marks)

(Total 20 marks)

3017/2/08/MA Page 4 of 16
MODEL ANSWER TO QUESTION 1

(a) Overhead absorption rate

Vehicle type A (2 x 11,000) 22,000km

Vehicle type B (4 x 12,500) 50,000km
Total 72,000km
Operational overheads for period £36,000
Overhead absorption rate (36,000/72,000) £0.50 per km

(i) Traditional absorption costing for each vehicle type

Vehicle type A B
£ £
Agency driver cost 5,200 5,000
Overheads 5,500 6,250
Total cost for the period per vehicle 10,700 11,250

Workings:
Overheads
Type A 0.5 x 11,000 = £5,500
Type B 0.5 x 12,500 = £6,250

(ii) Activity based costing for each vehicle type

Vehicle A Vehicle B
£ £ £ £
Agency driver cost 5,200 5,000
Servicing 264 300
Fuel 2,200 2,500
Cleaning 506 154
Insurance 780 260
Road fund licence 150 150
Depreciation 1,500 500
Administration 2,100 675
Rent 711 356
Overheads 8,211 4,895
Total cost 13,411 9,895

3017/2/08/MA Page 5 of 16
MODEL ANSWER TO QUESTION 1 CONTINUED

Workings:
Servicing Activity driver £1,728 / 72,000 = £0.024 per km
Vehicle A = 11,000 x 0.024 = £264
Vehicle B = 12,500 x 0.024 = £300
Fuel Activity driver £14,400 / 72,000 = £0.20 per km
Vehicle A = 11,000 x 0.2 = £2,200
Vehicle B = 12,500 x 0.2 = £2,500
Cleaning Activity driver £1628 / 148 = £11 per seat
Vehicle A = 46 x 11 = £506
Vehicle B = 14 x 11 = £154
Insurance Activity driver £2,600 / 200,000 = £0.013 per £ purchase price
Vehicle A = 60,000 x 0.013 = £780
Vehicle B = 20,000 x 0.013 = £260
Licence Activity driver £900 / 6 = £150 per vehicle
Vehicle A = £150
Vehicle B = £150
Depreciation Activity driver £5,000 / 200,000 = £0.025 per £ purchase price
Vehicle A = 60,000 x 0.025 = £1,500
Vehicle B = 20,000 x 0.025 = £500
Administration Activity driver £6,900 / 9,200 = £0.75 per travelling passenger
Vehicle A 5,600 / 2 x 0.75 = £2,100
Vehicle B 3,600 / 4 x 0.75 = £675
Rent Activity driver £2,844 / 8 = £355.50 per parking bay
Vehicle A 2 x 355.5 = £711
Vehicle B 1 x 355.5 = £355.50

3017/2/08/MA Page 6 of 16
QUESTION 2

(a) State two examples of each of the following:

(i) Stock holding costs
(ii) Stock-out costs
(4 marks)

A company uses two materials (Material P15 and Material Q12).

The following information is available regarding Material P15:

Cost of material £5.00 per kg
Order quantity 1,000 kg
Annual stock holding costs 12% of average stock holding value

The lead time for delivery can vary between 6 and 12 days and rate of usage varies between 20 and
30 kgs per day.

REQUIRED

(b) Calculate for material P15:

(i) the reorder level in kg to ensure no stock-outs occur
(ii) the minimum and maximum stock control levels in kg
(iii the annual stockholding costs in £s.
(8 marks)

The company maintains stock records that clearly show the physical stock, allocated stock, amount on
order and free stock.

The stock record card for material Q12 recorded the following information and balances at the
beginning of month 2:

Reorder level 2,500 kg of free stock

Reorder quantity 2,000 kg
Physical stock 1,250 kg
Allocated stock 550 kg
Amount on order 2,000 kg

The following transactions relating to material Q12 took place during month two:
Date
2nd 300 kg allocated to job number 121
3rd 550 kg issued to job number 116 (previously allocated)
4th 100 kg issued to job number 122 (not previously allocated)
8th Materials ordered at end of month 1 received
10th 500 kg allocated to job number 117
15th 250 kg returned to supplier as faulty. Supplier agreed to replace
20th 100 kg of surplus material from job number 116 returned to stock
27th Supplier replaced material returned on 15th of month

REQUIRED

(c) Write up the detailed stock record card for material Q12 for month 2.
(8 marks)

(Total 20 marks)

3017/2/08/MA Page 7 of 16
MODEL ANSWER TO QUESTION 2

(a) (i) Stock holding costs

Any two of the following:
Rent, Insurance, Material handling, Storekeeper’s salary, Interest

Stock-out costs
Costs resulting from any two of the following:
Lost sales: customer goes elsewhere
Late delivery
Production disrupted or halted

(b) (i) Re-order level = maximum usage x maximum lead time

= 30 kgs x 12 days = 360 kgs

(ii) Minimum stock control level

= Re-order level less (average usage x average lead time)
= 360 – (25 x 9) = 135 kgs

Maximum stock control level

= Re-order level less (minimum usage x minimum lead time)
plus re-order quantity
= 360 – (25 x 6) + 1,000 = 1,240 kgs

(iii) Annual stock holding costs

= 12% x average stock x cost of material per kg
Average stock = Order quantity/2 + minimum stock control level
= 1,000/2 + 135 = 635 kgs
Annual stock holding costs = 12% x 635 x £5
= £381

(c)
STOCK RECORD CARD

Material item Q12

Re-order level 2,500 kg of free stock
Re-order quantity 2,000 units

Date Receipts Issues Stock in Allocated Stock on Free

hand stock order
Month 2 Units Units Units Units Units Units
1 1,250 550 2,000 2,700
2 1,250 850 2,000 2,400
2 1,250 850 4,000 4,400
3 550 700 300 4,000 4,400
4 100 600 300 4,000 4,300
8 2,000 2,600 300 2,000 4,300
10 2,600 800 2,000 3,800
15 250 2,350 800 2,250 3,800
20 100 2,450 800 2,250 3,900
27 250 2,700 800 2,000 3,900

3017/2/08/MA Page 8 of 16
QUESTION 3

Quality Sands has prepared the following summarised budgeted Profit & Loss Account for the period
January to April:

Jan Feb Mar Apr

£000 £000 £000 £000

Sales 102 108 120 126

Costs
Raw materials used 51 54 60 63
Wages 10 11 12 13
Depreciation 4 4 4 4
Other overheads 12 12 12 12
77 81 88 92
Profit 25 27 32 34

End of month balances are:

Actual < Budgeted >

Dec Jan Feb Mar Apr
£000 £000 £000 £000 £000

Stock of raw materials 24 26 27 30 32

Debtors 72 76 74 87 84
Creditors for raw materials 42 45 54 52 60
Wages accrued 1 2 3 2 3

All sales are on credit. Goods are produced in the month of sale and no stocks of work-in-progress or
finished goods are carried.

Overheads are paid every 3 months in advance, the first payment of the year being in January.
A new machine will be purchased for £20,000 to be paid for 50% in January and 50% in April.
Loan interest of £5,000 is to be paid in March. The balance at bank on 1 January was £4,000.

REQUIRED

(a) Prepare the cash budget for each of the 4 months January to April. (16 marks)

(b) State two advantages of having a cash budget. (4 marks)

(Total 20 marks)

3017/2/08/MA Page 9 of 16
MODEL ANSWER TO QUESTION 3

(a) Workings

Jan Feb March April

Receipts from Debtors £000 £000 £000 £000
Sales 102 108 120 126
Less closing debtors 76 74 87 84
Add opening debtors 72 76 74 87
98 110 107 129

Payments to Creditors
Raw material usage 51 54 60 63
Add closing stock of raw materials 26 27 30 32
Less opening stock of raw materials 24 26 27 30
Raw material purchases 53 55 63 65
Less closing creditors 45 54 52 60
Add opening creditors 42 45 54 52
50 46 65 57

Wages
Earned 10 11 12 13
Less closing accrual 2 3 2 3
Add opening accrual 1 2 3 2
Wages paid 9 10 13 12

Cash Budget
Jan Feb March April
£000 £000 £000 £000
Receipts
Sales (debtors) 98 110 107 129
Payments
Creditors 50 46 65 57
Wages 9 10 13 12
Overheads 36 36
New machine 10 10
Loan interest 5
105 56 83 115

Net cash flow -7 54 24 14

Opening balance 4 -3 51 75
Closing balance -3 51 75 89

(b) Any two from:

(i) Cash shortages revealed early and arrangements can be made for overdraft on best terms.
(ii) Cash surpluses revealed and can be planned to be invested.
(iii) Required when applying for overdraft.

3017/2/08/MA Page 10 of 16
QUESTION 4

Triplex Ltd, which manufactures and sells each of its three products (Hay, Bee and Cee) for £20 per
unit, has prepared the following budget detail for year 8.

Product Hay Bee Cee

Sales (units) 10,000 8,000 6,000
Direct material (per unit) £6.00 £7.00 £5.00
Direct labour (per unit) £4.00 £6.00 £5.00
Fixed costs £90,000 for the year

REQUIRED

(a) Calculate the contribution to sales ratio for each product and for Triplex Ltd overall. (4 marks)

(b) Calculate the break-even revenue based on the budgeted sales mix. (2 marks)

(c) Draw a profit-volume chart for the budgeted sales mix. Indicate clearly on the chart the
break-even revenue, the margin of safety and the budgeted profit for year 8.
(7 marks)

The company is considering increasing its advertising on product Cee. Market research suggests that
this would generate a 50% increase in sales of product Cee, have no effect on the sales of product
Hay but would reduce the sales of product Bee by 25%.

The additional advertising would increase the fixed cost to £116,000 for the year.

REQUIRED

(d) Calculate the revised budgeted contribution to sales ratio for Triplex Ltd if advertising expenditure
is increased.
(4 marks)

(e) Advise the company, using supporting calculations, whether to increase the advertising on
product Cee.
(3 marks)

(Total 20 marks)

3017/2/08/MA Page 11 of 16
MODEL ANSWER TO QUESTION 4

(a)
Hay Bee Cee Total
£000 £000 £000 £000
Sales 200 160 120 480
Direct material 60 56 30
Direct labour 40 48 30
Variable cost 100 104 60 264
Contribution 100 56 60 216
Contribution to sales ratio 50% 35% 50% 45%

(b) Break-even revenue = Fixed cost/Overall contribution ratio

= £90,000/0.45
= £200,000

(c) Profit/Volume Chart

Title Fixed costs
Labelling Break-even revenue
Lines Margin of safety
Profit

(d)
Hay Bee Cee Total
£000 £000 £000 £000
Sales 200 120 180 500
Direct material 60 42 45
Direct labour 40 36 45
Variable cost 100 78 90 268
Contribution 100 42 90 232

Overall contribution to sales ratio = 232,000/500,000

= 46.4%

(e)
Budgeted profit year 8 (without additional advertising)
Overall contribution (£) 216,000
Fixed cost (£) 90,000
Profit (£) 126,000

Budgeted profit year 8 (with additional advertising)

Overall contribution (£) 232,000
Fixed cost (£) 116,000
Profit (£) 116,000

or

Increase in contribution of £16,000 is offset by increased fixed costs of £26,000.

Advise the company not to increase the advertising on product Cee, as its overall effect will be to
reduce the profit by £10,000.

3017/2/08/MA Page 12 of 16
 Budgeted Profit

Profit
Break-even Point

Margin of Safety

3017/2/08/MA Page 13 of 16
QUESTION 5

A company uses batch production methods to produce a single product by combining two materials
Tee and Pee. The company has budgeted for a material mix ratio of 80:20 for Tee and Pee
respectively.

The following information relates to each batch:

Direct material input 125 kg

Material Tee standard price £2 per kg
Material Pee standard price £5 per kg
Standard yield 100 kg of product.
The waste generated has no value.

Actual results for Month 10 were as follows:

Output 16,400 kg
Material Tee 16,380 kg £34,398
Material Pee 4,620 kg £22,638

There is no stock of raw material.

REQUIRED

(a) Calculate the following variances:

(i) Material price for each material and in total
(ii) Material mix for each material and in total
(iii) Material yield in total
(14 marks)

(b) Calculate the material usage variance and reconcile this with the appropriate variances calculated
in part (a)
(6 marks)

(Total 20 marks)

3017/2/08/MA Page 14 of 16
MODEL ANSWER TO QUESTION 5

a) (i) Material Price Variance

(Actual Usage x Std Price) – Actual cost
Tee (16,380 x £2) - £34,398 1638A 1
Pee (4,620 x £5) - £22,638 462F 1
1176A 1

(ii) Material Mix Variance

(Actual Usage in Std Proportions – Actual Usage) x Std Price
Tee [80% of (16,380 + 4,620) – 16,380] x £2 840F 3
Pee [20% of (16,380 + 4,620) – 4,620] x £5 2100A 3
1260A 1

Alternative solution for (ii)

(Actual input quantity – budgeted material input quantity for output produced) x (Standard
weighted average cost per unit – standard cost per input unit)

Tee [16,380 – 16,400/(100/125) x 0.8] x [2.6 – 2.0] 12A

Pee [4,620 – 16,400/(100/125) x 0.2] x [2.6 – 5.0] 1248A
1260A

(iii) Material Yield Variance

Method 1
[(Actual material input quantity – budgeted material input quantity for the output produced) x
standard weighted average cost per unit of material input]

[(16,380 + 4,620) – 16,400/(100/125)] x 2.6 1300A 4

or
Method 2
[(Actual output –budgeted output for the actual material input) x standard weighted average
cost per unit of output]

[16,380 + 4,620) x (100/125) – 16,400] x 3.25 1300A

Workings:
Standard weighted average cost per unit
Std cost of mix
Tee 100 kg x £2/kg = £200
Pee 25 kg x £5/kg = £125
£325

Standard weighted average cost (material input)

= £325/125 kg = £2.6/kg
Standard weighted average cost (material output)
= £325/100 kg = £3.25/kg

3017/2/08/MA Page 15 of 16
MODEL ANSWER TO QUESTION 5 CONTINUED

(b) Material Usage Variance

(Std Usage – Actual Usage) x Std price
{[16,400/(100/125) x 0.8] – 16,380} x £2.00 40F
+{[16,400/(100/125) x 0.2] – 4,620} x £5.00 2600A
2560A
Material Mix Variance 1260A
Material Yield Variance 1300A
Total 2560A

3017/2/08/MA Page 16 of 16 © Education Development International plc 2008