Topic: Costing Methods

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  • 12 Marks

MI – May 2016 – L1 – SB – Q1b – Costing Methods

Calculate production cost per unit, variable cost, contribution, break-even point, and total non-production cost.

Grammar Limited manufactures product G of which the sales for the year 2015 was ₦25,000,000 at the unit price of ₦40. Production overhead and selling overhead were ₦2.50 and ₦1.50 per unit, respectively. The following additional information are available for the year 2015:

₦/unit
Direct material used 8.50
Direct labour 7.50
Fixed production overhead 6.00
Fixed selling overhead 2.00
Administration overhead 4.00

You are required to calculate:

i. Full production cost per unit and value
ii. Variable cost per unit and value
iii. Contribution per unit and value
iv. Break-even point in value
v. Total non-production cost per unit and value
vi. New break-even point (to the nearest Naira) if additional distribution expenses of ₦1.50/unit was incurred

i. Full production cost per unit and value:

Production in units = 25 000 000 / 4 = 625,000 units

ii. Variable cost per unit and value:

 

Value 625,000 x N20.00 = 12,000,000

iii. Contribution per unit and value

Value 625,000 x N20.00 = 125,000,000

iv. Break even point in value

= N15,000,000

v. Total non-production cost per unit and value

Value 625,000 x N8.50 = N5,312,000

vi. New break-even cost point

=

=

= = N18,243,243

 

 

 

  • 8 Marks

MI – May 2016 – L1 – SB – Q1a – Costing Methods

State two advantages and two disadvantages of absorption and marginal costing.

State any TWO advantages and any TWO disadvantages of absorption and marginal costing.
(8 Marks)

Advantages of Absorption Costing:

  1. Provides a more accurate cost per unit as all costs, including fixed costs, are absorbed.
  2. Ensures compliance with accounting standards for financial reporting.

Disadvantages of Absorption Costing:

  1. Can be misleading for decision-making, as it allocates fixed costs to unit costs.
  2. May encourage overproduction to absorb fixed costs.

Advantages of Marginal Costing:

  1. Useful for decision-making as it focuses on variable costs and contribution margin.
  2. Simplifies cost control by excluding fixed overheads in unit cost calculations.

Disadvantages of Marginal Costing:

  1. Does not conform with external financial reporting standards.
  2. Ignores the importance of fixed costs in total cost structure.
  • 1 Marks

MI – May 2016 – L1 – SA – Q5 – Costing Methods

Calculate the absorption rate using Direct Labour for product YZ based on the given data.

The following data were extracted from the records of ABCYZ Limited in respect of its product YZ:
The absorption rate using Direct Labour is
A. N2.00
B. N8.00
C. N12.00
D. N24.00
E. N40.00

Answer:
B. N8.00

Explanation:
The absorption rate is calculated using the formula:
Absorption Rate = Total Overhead Cost/Total Direct Labour Hours
Given the data, the total overhead cost and total direct labour hours can be used to find the rate per hour. Based on the calculations, the absorption rate comes out to be N8.00 per direct labour hour. This means for every direct labour hour worked, N8.00 is allocated as the overhead cost to product YZ.

  • 20 Marks

MI – May 2024 – L1 – SB – Q3 – Costing Methods

Compute the price of store issues and the value of closing stocks using FIFO and LIFO methods.

From the information given below, you are required to compute the price of store issues and the value of closing stocks using:
i. First-In-First-Out (FIFO) basis
ii. Last-In-First-Out (LIFO) basis

  • January 2nd: Purchased 500 Units of XYZ at N40 per unit
  • January 7th: Purchased 200 Units at N45 per unit
  • January 10th: Issued 300 Units
  • January 12th: Purchased 350 Units at N42 per unit
  • January 15th: Issued 500 Units
  • January 18th: Purchased 200 Units at N38 per unit

a. Pricing using FIFO:

  • On January 10, 300 units are issued at N40 (first purchase price).
  • On January 15, 200 units are issued at N40 (from remaining January 2 stock) and 200 units at N45 (from January 7 stock), and 100 units at N42 (from January 12 purchase).
  • Closing stock: The closing stock consists of 250 units at N42 and 200 units at N38.

The closing stock value using FIFO is N18,100.

b. Pricing using LIFO:

  • On January 10, 300 units are issued at N45 (most recent purchase).
  • On January 15, 350 units are issued at N42 (from January 12 purchase), and 150 units at N40 (from January 2 stock).
  • Closing stock: The closing stock consists of 250 units at N40 and 200 units at N38.

The closing stock value using LIFO is N17,600.

Explanation: FIFO assumes that the first goods purchased are the first ones sold, so the closing stock reflects the most recent purchases. LIFO assumes that the last goods purchased are the first ones sold, so the closing stock reflects the older purchase prices.

  • 20 Marks

MI – May 2015 – L1 – SB – Q3 – Costing Methods

Analyze a make or buy decision for MOP heads production.

Tripple Company Limited manufactures “MOP Heads” for use in its various offices across the country. The Cost Accountant has the following costs per unit produced:

A nearby company, Dusters Nigeria Enterprises, has offered to sell 10,000 units of these MOP Heads to Tripple Company Limited for N135 per unit. If Tripple Company Limited accepts the offer, some of the facilities presently in use to manufacture MOP Heads could be rented out to a third party at an annual rent of N195,000. In addition, N18 per unit of the fixed overhead cost applied to the production of MOP Heads would be totally eliminated. The Cost Accountant has also established that 75% of the overhead is fixed.

You are required to:

a. Advise the Chief Executive Officer of Tripple Company Limited whether the company should accept the offer of Dusters Nigeria Enterprises or not. (15 Marks)

b. State FIVE other qualitative factors that the Chief Executive Officer of Tripple Company Limited should consider in making a decision in (a) above. (5 Marks)

a)

TRIPPLE COMPANY LIMITED
CALCULATION OF SAVING OR DEFICIT FROM MAKING 10,000 UNITS OF
MOP HEADS

Conclusion: Tripple Company Limited should continue making the MOP heads in-house.

b. Qualitative Factors to Consider

  1. Quality control over the production of MOP heads.
  2. Dependability and reliability of the external supplier.
  3. Possible long-term pricing changes by Dusters Nigeria Enterprises.
  4. Flexibility in production and ability to meet demand variations.
  5. Impact on existing staff and morale if production is outsourced.

 

  • 1 Marks

MI – May 2024 – L1 – SA – Q10 – Costing Methods

Identifies a statement that is NOT a common feature of process costing systems.

There are common features in most process costing systems. Which of the following is NOT one of the common features? A. Clearly defined process cost centres and the accumulation of all costs
B. Maintenance of accurate records of units and part units produced and the cost incurred by each process
C. Averaging of the prime costs of each process over the total production of that process, excluding partly completed units
D. Charging of the cost of the input of one process as the raw materials input of the following process
E. Clearly defined procedures for separating costs where the process produces two or more products

Answer: C. Averaging of the prime costs of each process over the total production of that process, excluding partly completed units

Explanation: In process costing, the prime costs are typically averaged over both completed and partly completed units to ensure accurate cost allocation. Excluding partly completed units from the calculation would result in an inaccurate distribution of costs, making option C incorrect. The other options reflect standard practices in process costing, such as using clearly defined cost centres and charging costs from one process to the next.

  • 1 Marks

MI – May 2024 – L1 – SA – Q4 – Costing Methods

Identifies an aspect that is NOT a practical implication of Just-In-Time production.

Which of the following is NOT a practical implication of Just-In-Time production? A. Production times must be very fast
B. Production must be reliable
C. Factory layout must not change to reduce movement
D. Deliveries from suppliers must be reliable
E. There must be full employee involvement

C. Factory layout must not change to reduce movement

Explanation: In a Just-In-Time (JIT) production system, flexibility and efficiency are key. Factory layouts are often designed to minimize movement and waste, so stating that the layout “must not change” is incorrect. The other options, such as fast production times, reliable suppliers, and employee involvement, are typical characteristics of JIT systems aimed at minimizing inventory and improving efficiency.

  • 1 Marks

MI – May 2024 – L1 – SA – Q3 – Costing Methods

Identifies an item that is not part of the purchase process in material management.

Which of the following is NOT part of the purchase process?

A. Purchase requisition
B. Purchase order
C. Material usage note
D. Goods received note
E. Purchase invoice

C. Material usage note

Explanation: The material usage note is part of the production and inventory management process but is not directly involved in the purchase process. The purchase process typically includes steps such as requisition, ordering, receiving goods, and invoicing. Material usage relates to how materials are used during production after they have been procured.

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