BAC 202: COST ACCOUNING ONE

CONTINUOUS ASSESSMENT TEST TWO

1ST SEMESTER 2020/2021
Instructions
1. Answer all questions.
2. Show all your workings.
3. Deadline: The following DAY AFTER reporting for THE FINAL EXAMINATIONS.

QUESTION ONE
Wajenzi Limited commenced its operations on 1 January 2020. The company was engaged in
one contract only, the price of which was Sh. 100 million. The trial balance of the company as at
31 December 2020 was as follows:

Sh. Sh.
‘000’ ‘000’
Share capital 20,000
Creditors 2,000
Cash received on contract (80% of work 40,000
certified) 8,000
Land and buildings 4,800
Bank balance 18,000
Materials charged on contract 5,000
Plant (original cost 1 January 2020) 25,000
Wages _____
Expenses 1,200 62,000
62,000

Additional information:
1. Wages outstanding amounted to Sh. 3 million.
2. Expenses outstanding amounted to Sh. 200,000.
3. Depreciation on plant was at a rate of 10% per annum on time basis.
4. Materials on hand at site as on 31 December 2020 were valued at Sh. 800,000.
5. A part of plant (original cost Sh. 1,000,000) was destroyed by fire on 30 September 2020.
This was subsequently sold as scrap for Sh. 200,000 on 31 December 2020.
6. Plant (original cost Sh. 1,000,000) was transferred to another contract on 31 December
2020.
7. Work uncertified as on 31 December 2020 was Sh. 400,000.
8. Materials costing Sh. 800,000 was destroyed by fire on 31 December 2020.

Required:
(a) Contract account for the period ended 31 December 2020 (6 marks)
(b) Profit and loss account for the year ended 31 December 2020 (4 marks)
(c) Balance sheet as at 31 December 2020. (5 marks)

1
QUESTION TWO
XYZ Ltd. carries on its business in Nairobi. The company has been reporting its profits using
absorption costing system. During the financial year ended 30 September 2020, the following
summary statement was provided:

Shs. Shs.
Sales (4,000 units) 5,000,000

Production cost of sales:

Variable 3,000,000
Fixed 1,000,000 (4,000,000)
Gross profit 1,000,000

Expenses:
Variable 800,000
Fixed 800,000 (1,600,000)
Net loss (600,000)

Currently the company is implementing strategies to improve its profitability, which are to be
implemented in two phases; A and B. Each phase will cover a period of six months.

The expected production and sales in units for each of the phases are shown below:

Phase A Phase B
Units Units
Production 2,500 3,000
Sales 2,400 2,900

The fixed costs are expected to increase by 20% while the variable costs per unit will remain as
they were in the previous period. The selling price per unit will be Shs. 1,500.

Required:
(a) Profit and loss statements for phases A and B using:
(i) Marginal costing. (5 marks)
(ii) Absorption costing (5 marks)
(b) Briefly explain the differences resulting from the two methods employed in (a) above of
reporting profits. (2 marks)
(c) Reconcile the resulting difference in the reported profit under the two methods. (3 marks)