Topic: Cost and Cost Behaviour

Search 500 + past questions and counting.
Professional Bodies Filter
Program Filters
Subject Filters
More
Tags Filter
More
Check Box – Levels
Series Filter
More
Topics Filter
More
  • 20 Marks

IMAC – MAR 2024 – L1 – Q1 – Cost and Cost Behaviour

Calculate total cost, unit cost, and profit per unit for a batch of 5,000 units and determine real fixed and variable costs after adjusting for inflation.

a) Atimbila Ltd manufactures a product that goes through various workshops. The following budgeted overheads for the year 2023, based on normal activity levels, have been provided:

Workshop Budgeted Overheads (GH¢) Overhead Absorption Base
Forming 360,000 30,000 labour hours
Machining 860,000 50,000 machine hours
Welding 400,000 36,000 labour hours
Assembly 300,000 20,000 labour hours

Selling and administrative overheads are 25% of factory cost.

An order for 5,000 units of the product (Batch 3391) incurred the following costs on 31 August 2023:

  • Materials: GH¢62,140
  • Labour:
    • 1,280 hours forming shop at GH¢10.50 per hour
    • 4,520 hours machining shop at GH¢11 per hour
    • 900 hours welding shop at GH¢10.50 per hour
    • 1,750 hours assembly shop at GH¢9.60 per hour
  • An amount of GH¢1,050 was paid for the hire of a special X-ray equipment for testing the welds. The time booking in the machine shop was 6,430 machine hours. Selling price was GH¢150 per product.

Required:
i) Compute the total cost of the batch. (10 marks)
ii) Calculate the unit cost per product. (1 mark)
iii) Determine the profit per product. (1 mark)

b) The following cost and production data relates to the operations of Mawuga Ltd over a two-year period:

Year Production (units) Total Costs (GH¢)
2022 50,000 1,700,000
2023 54,000 1,835,400

Between 2022 and 2023, there has been a 5% cost inflation.

Required:
i) Calculate the real fixed and variable costs. (6 marks)
ii) Estimate what the total costs will be in 2024 if it is expected that there will be 4% cost inflation and output will be 56,000 units. (2 marks)

 

  • 20 Marks

IMAC – Mar 2023 – L1 – Q2 – Budgeting | Cost and Cost Behaviour

Prepare functional budgets for sales, production, and direct material purchases for Naa Sei enterprise.

Naa Sei enterprise wishes to prepare his functional budgets for the year 2023. The following information has been provided.

Sales

Year Quarter Units
2023 1 1,200
2023 2 1,500
2023 3 2,000
2023 4 1,800

2024

Year Quarter Units
2024 1 2,200
2024 2 2,300

The projected selling price is GH¢15 for the first two quarters, and this will increase by 10% in the third quarter. There will be no further price increase.

Inventory policy
i) Finished Goods: The company plans to keep 10% of the following quarter’s sales quantity. The opening inventory of finished goods is 120 units.
ii) Direct Materials: Only one material is used in production. 5 kilograms of the material are required for the production of a unit of a product. Closing inventory is expected to be 20% of the following quarter’s requirement. The cost of material is expected to be GH¢2 per kilogram.

Required:
Prepare the following functional budgets for each of the four quarters in 2023.
a) Sales
b) Production
c) Direct material purchases in value

a)
Sales budget

Quarter 1 2 3 4
Quantity 1,200 1,500 2,000 1,800
Selling price/unit (GH¢) 15 15 16.5 16.5
Revenue (GH¢) 18,000 22,500 33,000 29,700

Total: (4 marks)

b)
Production budget

Quarter 1 2 3 4 5 6
Quantity 1,200 1,500 2,000 1,800 2,200 2,300
Add closing stock 150 200 180 220 230
Less opening stock 120 150 200 180 220
Production quantity 1,230 1,550 1,980 1,840 2,210

Total: (6 marks)

c)
Material purchases budget

Quarter 1 2 3 4 5
Production quantity 1,230 1,550 1,980 1,840 2,210
Requirement /unit 5 5 5 5 5
Total requirement 6,150 7,750 9,900 9,200 11,050
Add closing stock 1,550 1,980 1,840 2,210
Less opening stock 1,230 1,550 1,980 1,840
Requirement 6,470 8,180 9,760 9,570
Selling price/unit GH¢ 2 2 2 2
Cost of materials (GH¢) 12,940 16,360 19,520 19,140

Total: (10 marks)

  • 20 Marks

IMAC – AUG 2022 – L1 – Q5 – Costs and Cost Behaviour

Establishment of total cost function using high-low method, profit calculation for a specific production level, and identification of advantages and disadvantages of high-low method.

a) Takyi Carpentry makes twin-desk for local schools in the Daboase District. To facilitate control, the owner of the shop has asked you to assist him in analysing cost into fixed and variable elements.

Below is his six-year financial information:

Year No. of Twin-Desk Revenue (GH¢) Profit (GH¢)
2016 1,800 19,600 6,000
2017 1,700 22,000 6,200
2018 1,750 20,300 5,800
2019 2,100 26,200 8,000
2020 1,950 22,400 7,500
2021 2,050 21,800 6,800

Required: i) Establish total cost function using high-low method. (5 marks)

ii) Calculate profit for making 3,500 units of the twin-desk if the selling price is fixed at GH¢20. (3 marks)

iii) Identify TWO (2) advantages and TWO (2) disadvantages of using high-low method. (4 marks)

iv) Identify THREE (3) importance for classifying cost as fixed and variable. (3 marks)

b) For managers within a company, exercising control through standards and standard costing is a creative program aimed at determining whether the organisations’ resources are being used optimally. Standard costs are typically determined during the budgetary control process because it uses predetermined standard costs for direct material, direct labour and factory overheads.

Required: Explain THREE (3) benefits to a company that uses standard costing. (5 marks)

i) Establish total cost function using high-low method:

Year No. of Twin-Desk Total Cost (GH¢)
2016 1,800 13,600
2017 1,700 15,800
2018 1,750 14,500
2019 2,100 18,200
2020 1,950 14,900
2021 2,050 15,000

Using high and low points:

  • High point: 2,100 units and GH¢18,200
  • Low point: 1,700 units and GH¢13,600

iii) Advantages and disadvantages of using high-low method: Advantages:

  1. Simplicity: Easy to use and understand.
  2. Limited Data Requirement: Requires only two data points, making it useful when limited data is available.

Disadvantages:

  1. Inaccuracy: May result in high variances as it only uses two extreme points.
  2. Not Representative: May not represent the entire data set accurately if the high and low points are outliers.

iv) Importance for classifying cost as fixed and variable:

  1. Decision Making: Helps in making informed business decisions, such as pricing and budgeting.
  2. Break-even Analysis: Essential for calculating the break-even point and understanding cost behavior.
  3. Cost Control: Facilitates effective cost control and management by understanding cost behavior patterns.

b) Benefits of standard costing:

  1. Budgeting and Planning: Provides a basis for planning the use of organizational resources effectively.
  2. Performance Measurement: Allows for evaluation of managerial performance by comparing actual results with standard costs.
  3. Motivation: Acts as a motivating tool for managers and employees to achieve set targets.
  • 20 Marks

IMAC – NOV 2021 – L1 – Q3 – Cost and Cost Behaviour | Marginal Costing and Absorption Costing

Explanation of different cost classifications and advantages of marginal costing over absorption costing.

a) Costs may be classified in various ways according to their nature and the information needs of management.

Required:
Explain the following pairs of costs:
i) Direct and Indirect Costs (3 marks)
ii) Fixed and Variable Costs (3 marks)
iii) Controllable and Non-controllable Costs (3 marks)
iv) Production and Non-production Costs (3 marks)
v) Relevant and Irrelevant costs (3 marks)

b) QQQ Ltd has been reporting using an absorption costing technique. However, at a management retreat attended by the Cost and Management Accountant, they discussed the information usefulness of marginal costing reports for short-term decision making extensively.

Required:
Outline FIVE (5) advantages of a marginal costing system of reporting compared to absorption costing system for consideration by the management of QQQ Ltd. (5 marks)

 

a) i) Direct and Indirect Costs:

  • Direct costs can be directly identified with a specific cost unit or cost center. Examples include direct materials, direct labour, and direct expenses. The total of direct costs is known as the prime cost.
  • Indirect costs cannot be directly identified with a specific cost unit or cost center. Examples include indirect materials, indirect labour, and indirect expenses. The total of indirect costs is known as overheads.

ii) Fixed and Variable Costs:

  • Fixed costs are incurred for an accounting period and remain constant in total within certain activity levels.
  • Variable costs vary in total in direct proportion with the level of activity.

iii) Controllable and Non-controllable Costs:

  • Controllable costs can be influenced by a given level of managerial authority and are within the domain of that managerial authority and responsibility.
  • Non-controllable costs cannot be influenced by a given level of managerial authority and are usually determined by higher levels of managerial authority and shared among lower levels.

iv) Production and Non-production Costs:

  • Production costs relate to the manufacture of a product or the provision of a service and are included in the cost of sales. Examples include direct materials, direct labour, direct expenses, and production overheads.
  • Non-production costs are not directly associated with the production of the business’s output and are charged to the statement of profit or loss as expenses for the period they are incurred. Examples include administrative, selling, and finance costs.

v) Relevant and Irrelevant Costs:

  • Relevant costs make a difference in decision making, are generally incremental, futuristic in nature, and involve cash outlays.
  • Irrelevant costs do not vary with a given decision under consideration and do not impact the decision. They are usually sunk or past costs that have already been incurred or fixed costs that must be incurred regardless of the decision.

b) Advantages of marginal costing over absorption costing:

  1. It discourages stock build-up.
  2. There is no under or over absorption of overheads, and hence no adjustment is required in the statement of profit or loss.
  3. Fixed costs are treated as period costs and charged in full to the period under consideration.
  4. Marginal costing is useful in short-term decision-making processes.
  5. It is simple to operate.
  6. Separating costs into fixed and variable facilitates cost control. (Any 5 points @ 1 mark each = 5 marks)
  • 20 Marks

IMAC – MAY 2021 – L1 – Q2 – Budgeting | Cost and Cost Behaviour | Relevant Cost and Revenue

QR activity-based budgeting system for products Q and R, and working capital calculation for a company.

a) QR uses an activity based budgeting (ABB) system to budget product cost. It manufactures two products, product Q and product R. The budget details for these two products for the forthcoming period are as follows:

Product Q Product R
Budgeted production (units) 80,000 120,000
Number of machine setups per batch 4 3
Batch size (Units) 5,000 4,000

The total budget cost of setting up the machine is GH¢74,400.

Required: i) State and explain THREE (3) objectives of budgeting. (6 marks)

ii) Calculate the budgeted machine setup cost per unit of product Q and R. (5 marks)

iii) State THREE (3) benefits and TWO (2) limitations of using an activity-based budgeting system. (5 marks)

b) A company has annual sales revenues of GH¢30 million and the following working capital periods:

Period Months
Inventory conversion period 2.5
Accounts receivable collection period 2.0
Accounts payable payment period 1.5

Production costs represent 70% of sales revenue.

Required: Calculate the total amount held in working capital excluding cash and cash equivalents. (4 marks)

a) i) Objectives of a budgetary control system:

  1. To compel planning: Budgeting ensures that managers plan for the future by producing detailed plans to implement the company’s long-term goals.
  2. To coordinate activities: Budgeting aligns the activities of different departments into a common plan, ensuring efficient resource allocation and scaling production based on anticipated changes.
  3. To communicate activities: Budgets formalize management expectations and facilitate communication between different departments.

ii) Calculation of budgeted machine setup cost per unit:

  • Number of batches for Product Q = 80,000 / 5,000 = 16
  • Number of batches for Product R = 120,000 / 4,000 = 30
  • Machine setups per batch: Product Q = 4, Product R = 3
  • Total number of setups: Product Q = 64, Product R = 90, Total = 154
  • Budgeted cost per setup = GH¢74,400 / 154 = GH¢483.12Budgeted cost per unit:
    • Product Q: (64 setups x GH¢483.12) / 80,000 units = GH¢0.39 per unit
    • Product R: (90 setups x GH¢483.12) / 120,000 units = GH¢0.36 per unit

    iii) Benefits of Activity-Based Budgeting:

    1. Clear cost-activity linkage.
    2. Better resource allocation.
    3. Enhanced capacity utilization review.

    Limitations:

    1. Time-consuming and resource-intensive.
    2. Requires expert team and sophisticated software.

    b) Working Capital Calculation:

    • Inventory: (GH¢30m x 0.7 x 2.5) / 12 = GH¢4.375m
    • Accounts receivable: (GH¢30m x 2) / 12 = GH¢5m
    • Accounts payable: (GH¢30m x 0.7 x 1.5) / 12 = GH¢2.625m
    • Total working capital = GH¢4.375m + GH¢5m – GH¢2.625m = GH¢6.75m

     

  • 20 Marks

IMAC – NOV 2020 – L1 – Q3 – Cost and Cost Behaviour

Explain various cost terms in management accounting; identify characteristics of services.

a) Cost is a generic term used by accountants to mean the expenses that are incurred in the production of goods and the delivery of services. The nature of cost is, however, well understood by a preceding adjective.

Required:
Explain the difference between the following cost terms as used in Management Accounting:
i) Direct and Indirect cost. (3 marks)
ii) Fixed and Variable cost. (3 marks)
iii) Controllable and Uncontrollable cost. (3 marks)
iv) Full and Marginal cost. (3 marks)
v) Production and Non-Production cost. (3 marks)

b) Costs can be established for services and operations in the same way as for physical goods even though services are different from physical goods.

Required:
Identify and explain TWO (2) characteristics of services. (5 marks)

a)
i) Direct and Indirect Cost
Direct costs can be traced directly and in full to the product, service, or department, such as direct materials and direct labour. Indirect costs cannot be directly traced to a single product or service, such as factory rent or office supplies.

ii) Fixed and Variable Cost
Fixed costs remain constant in total regardless of the level of activity within a relevant range, such as rent or salaries. Variable costs vary in total directly and proportionately with changes in the level of activity, such as raw materials and direct labour.

iii) Controllable and Uncontrollable Cost
Controllable costs are those which can be influenced by the decisions or actions of a manager at a particular level of management, such as advertising expenses. Uncontrollable costs cannot be influenced by a manager, such as property taxes.

iv) Full and Marginal Cost
Full cost includes both fixed and variable costs associated with the production of goods or services. Marginal cost refers to the cost of producing one additional unit of a product or service, which usually includes only variable costs.

v) Production and Non-Production Cost
Production costs are incurred in the manufacturing process, such as raw materials and direct labour. Non-production costs include expenses that are not directly tied to the production process, such as marketing and administrative expenses.

(Each explanation well stated, 3 marks each)

b) Characteristics of Services
i) Intangibility:
Services cannot be seen, touched, or stored. They are intangible, meaning that they are experienced rather than possessed. For example, consulting or teaching services cannot be physically touched or stored for later use.

ii) Inseparability:
Services are produced and consumed simultaneously. They cannot be separated from the service provider, meaning the production and consumption of a service occur at the same time. For instance, a haircut is provided and consumed at the same time.

(5 marks)

Take control of your business data with insight and in-depth understanding by taking this course. 

Services

Contact Info

  • +233203701923
    +233543919232
  • info@noohrabusiness.com

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope