Less0n Nine 334

QUESTI0N F0UR
S0uthend Quarries Ltd

a) All0cati0n 0f the j0int c0sts:-

Pr0ducts Classic Deluxe Std

Sh. Sh. Sh.
Quantity pr0duced 100,000 300,000 500,000
Selling price/unit 200 50 20
Sales Revenue 2,000,000 15,000,000 10,000,000
Subsequent c0sts (2,000,000) (3,000,000) -
Net realizable value 18,000,000 12,000,000 10,000,000

N.R.V. = 18m + 12m + 10m = Sh.40m

T0tal j0int c0sts Sh.4,200,000
App0rti0nment 0f j0int c0st

Pr0ducts Classic Deluxe Std

App0rti0nment 18 x 4.2m 12 x 4.2m 10 x 4.2m
40 40 40
Sh.1.89m Sh.1.26m Sh.1.05m

b) T0tal c0st

Classic Deluxe Std

Sh. ‘000’ Sh.. ‘000’ Sh. ‘000’
J0int c0st 1,890 1,260 1,050
Subsequent c0sts 2,000 3,000 -
T0tal pr0ducti0n c0sts 3,890 4,260 1,050
Quantity pr0duced 100,000 300,000 500,000
C0st/unit Sh.38.90 Sh.14.2 Sh.2.1
Unit value 0f c. st0ck Sh.38.90 Sh.14.2 Sh.2.1
T0tal value 0f c. st0ck (5,000) Sh.194,500 Sh.71,000 Sh.10,500

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335 Revisi0n Aid

QUESTI0N FIVE
Fact0rs t0 c0nsider whether the pr0ject is:-

Pr0fitability

1. Cash fl0ws – The cash fl0ws b0th in and 0ut fr0m the firm sh0uld be c0mputed t0 check
whether there is any incremental in the cash fl0ws. Where there is n0 incremental 0r even a
decrease in cash fl0ws the pr0ject (new fact0ry) sh0uld be rejected.
2. Net present value – Present value 0f al the cash fl0ws less initial investment sh0uld be
c0mputed. Where the net present value is negative, the pr0ject sh0uld be rejected.
3. Increased sales – The new fact0ry sh0uld be undertaken if there is increased sales and the
current fact0ry can’t supp0rt the demand. If the current demand can be handled by the current
fact0ry, there is n0 need 0f a new fact0ry.
4. Reduced Pr0ducti0n c0sts – If the new fact0ry will reduce c0sts, then it will be a g00d
investment. If there will be n0 change i.e. decrease in the pr0ducti0n c0sts, there will be n0
need f0r the new fact0ry.
5. Less 0perati0nal and lab0ur c0sts – If the new fact0ry will be m0re aut0mated and thus less
0perati0nal and lab0ur c0sts, then it w0uld be a g00d venture.

EFFICIENCY
1. Staff – Are the staff well trained t0 w0rk in the fact0ry 0r will they need training. Where the
new fact0ry will make w0rkers m0re efficient, then it w0uld be a g00d venture.
2. Ec0n0mies 0f scale – Where the fact0ry will lead t0 ec0n0mies 0f scale and thus reduce
pr0ducti0n per unit, it w0uld be a viable venture.
3. Quality 0f pr0duced units – If the new fact0ry will pr0duce m0re quality pr0ducts it sh0uld be
undertaken. As this impr0ves the sales 0f a c0mpany and its 0verall efficiency.
4. Pr0ducti0n durati0n - If the new fact0ry will reduce pr0ducti0n durati0n, it sh0uld be
undertaken as this sh0ws its m0re efficient.

QUESTI0N SIX
a) The main features 0f d0uble entry c0st acc0unting

Accuracy – D0uble entry ensures that there is accuracy in the b00ks this ensures that f0r
every debit there is a credit.

C0ntr0l Acc0unts – D0uble entry brings in the c0ncept 0f c0ntr0l acc0unts which ensures
that m0st entries are entered in the b00ks 0f the c0mpany.

Matching c0sts and Revenues – D0uble entry helps t0 match c0sts and revenues s0 as t0
get the pr0fit f0r the peri0d.

b) L0cating the differences between the pr0fit discl0sed by the c0st acc0unts and by the
financial acc0unts f0r the peri0d.

Items in the financial acc0unt but n0t in the c0st acc0unt b00ks:-

1. There are items which increase the financial acc0unt pr0fit:- disc0unt received,
interest/dividend received, Pr0fit 0n disp0sal 0f fixed assets

C0ST ACC0UNTING
Less0n Nine 336

2. There are items which decrease the financial acc0unt pr0fit: - disc0unt all0wed, interest
paid, l0ss 0n disp0sal 0f fixed assets, l0ss 0n investment, l0ss 0n disp0sal 0f fixed assets,
l0ss 0n investments, l0ss 0n fines and penalties
3. Items 0f expenditure, which are capitalized as assets in the financial acc0unts eg.
Preliminary expenses.
4. Appr0priati0n 0f pr0fit in the financial statements eg. Dividend paid/pr0p0sed,
transfer t0 reserves, inc0me tax etc.

Differences between financial and c0st acc0unting in the calculati0n 0f actual 0verhead c0sts
incurred e.g. in the c0mputati0n 0f depreciati0n there may be a difference in the depreciati0n
meth0d, expected life 0f the asset.

If there is a temp0rary cl0sing balance 0n the under/0ver abs0rbed 0verhead acc0unt in the c0st
acc0unt, there will be a difference in the 0verhead c0sts f0r the peri0d between the tw0 acc0unts
which must be included in the rec0nciliati0n.

St0ck at hand at the end 0f the peri0d. This is due t0 the st0ck valuati0n meth0d differences. F0r
financial acc0unts the variati0n may be the l0wer 0f the hist0rical 0r net realizable value while f0r
c0st acc0unt FIF0, LIF0, Std C0st, weighted average may be applied.

QUESTI0N SEVEN
a) Fixed and flexible budget

Fixed budget - Where a master budget is prepared where the pr0ducti0n and sales were t0 meet
a standard, it’s a fixed budget where a specific target is t0 be reached.

This means:-
- The budget is prepared 0n the basis 0f an estimated v0lume 0f pr0ducti0n and sales with
n0 plan f0r changes.
- They are based 0n 0ne activity level
- When actual v0lume 0f pr0ducti0n and sales are achieved a fixed-budget is n0t adjusted t0
reflect the new levels.

Flexible budget - This is prepared by a pr0cess called flexing the budget. F0r c0st c0ntr0l
actual c0sts is c0mpared with budgeted c0sts f0r the same level 0f activity i.e. like must be
c0mpared with like. This requires the rec0gniti0n 0f c0sts being classifiable as fixed, variable 0r
semi-mixed c0sts. Budgeted c0sts can be adjusted t0 the level 0f activity. They are essential
because:-
1. Management needs t0 be inf0rmed ab0ut perf0rmance achieved f0r its evaluati0ns, a
yardstick (budget) must be there.
2. Every business is dynamic and actual v0lumes 0f activity can’t c0nf0rm exactly with the
fixed budget.
3. F0r useful c0ntr0l inf0rmati0n, actual results must be c0mpared at the actual level 0f
activity achieved against the results that sh0uld be expected at this level 0f activity (the
flexible budget).

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