Question bank: Objective test and long-form questions

CHAPTER 5 – COST FLOW IN PRODUCTION

5.1 COST LEDGER

At 1 July a manufacturing company had the following balances in the general ledger
adjustment account in its cost ledger:
Rs.
Balance brought forward (credit) 5,625
Stores ledger control account 2,125
Finished goods stock control account 1,500
Work in progress control account 2,000
Required
Open ledger accounts for the above items in the cost ledger, post the following
items which occurred in the four-month period up to 31 October and open up other
accounts as considered necessary, including a costing profit and loss account.
Rs.
Stock material purchased 12,000
Stock materials issued to production 12,500
Stock materials issued to maintenance department 1,000
Wages – direct 10,830
Included in direct wages is indirect work 600
Factory overheads incurred 4,200
Factory overheads absorbed into production 5,800
Work transferred to finished stock, at cost 24,000
Factory cost of sales 22,500
Sales at selling price 28,750
Administrative and selling costs (to be written off against profits) 4,250
(16)

5.2 KAAT LTD

Kaat Ltd operates separate cost accounting and financial accounting systems. The
following manufacturing and trading statement has been prepared from the financial
accounts for the quarter ended 31 March.
Rs. Rs.
Raw materials
Opening stock 48,000
Purchases 108,800
———–
156,800
Closing stock (52,000)
———–
Raw materials consumed 104,800
Direct wages 40,200
Production overhead 60,900
———–
Production cost incurred 205,900

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Cost and management accounting

Rs. Rs.
Work in progress
Opening stock 64,000
Closing stock (58,000)
——— 6,000
–––––––
Cost of goods produced carried down 211,900
–––––––

Rs. Rs.
Sales 440,000
Cost of goods sold
Finished goods opening stock 120,000
Cost of goods produced brought down 211,900
———–
331,900
Finished goods closing stock (121,900)
———– (210,000)
–––––––
Gross profit 230,000
–––––––
The following information has been extracted from the cost accounts:
Control account balances at 1 January
Rs.
Raw material stores 49,500
Work in progress 60,100
Finished goods 115,400

Transactions for the quarter

Rs.
Raw materials issued 104,800
Cost of goods produced 222,500
Cost of goods sold 212,100
Loss of materials damaged by flood (insurance claim pending) 2,400
A notional rent of Rs.4,000 per month has been charged in the cost accounts.
Production overhead was absorbed at the rate of 185% of direct wages. Profit at
the end of the period is shown as Rs.238,970.

Required
(a) Prepare the following control accounts in the cost ledger:
(i) Raw materials stores
(ii) Work in progress
(iii) Finished goods
(iv) Production overhead. (9)
(b) Prepare a statement reconciling the gross profit as per the cost accounts and
the financial accounts. (3)
(12)

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 Question bank: Objective test and long-form questions

5.3 MIRZA LIMITED

Mirza Limited is engaged in the manufacturing of spare parts for automobile
industry. The company records the purchase and issue of materials in a store
ledger which is not integrated with the financial ledger. It is the policy of the
company to value inventories on weighted average basis. The valuation is carried
out by the Finance Department using stores memorandum record. A physical stock
count is carried out after every six months. Any shortage/excess is then adjusted
in the financial as well as stores ledger.
On December 31, 20X3, physical stock count was conducted by the Internal
Auditor of the company. He submitted the following statement to the Finance
Department:
Balance (in units) Cost per unit (Rs.)
Item Code Store Financial
Physical Average Current
Ledger Records
010-09 20,500 20,500 20,000 2.00 2.25
013-25 10,000 10,000 10,000 4.00 1.50
017-10 5,500 5,500 5,000 1.00 1.10
022-05 4,000 4,500 5,500 2.00 2.00
028-35 1,200 1,200 1,000 2.75 2.50
035-15 640 600 600 3.00 3.50

On scrutinizing the details, Finance Department was able to ascertain the following
reasons:
Item Code Reasons

500 units were defective and therefore the Internal Auditor

010-09
excluded them while taking the physical count.

This item is not in use and is considered obsolete. The net

013-25
realizable value is Rs. 0.60 per unit.

017-10 Shortage is due to theft.

A receipt of 1,000 units was not recorded. The remaining

022-05
difference is due to errors in recording the quantity issued.

200 units returned to a supplier were not recorded. The invoiced

028-35
cost was Rs. 3 per unit.

035-15 Discrepancy is due to incorrect recording of a Goods Receipt Note.

Required
(a) Prepare necessary Journal entries to record the adjustments in the financial
ledger.
(b) State how would you make the necessary adjustments in the stores ledger?
(14)

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Cost and management accounting

5.4 QUALITY LIMITED

Quality Limited (QL) is a manufacturer of washing machines. The company uses
perpetual method for recording and weighted average method for valuation of
inventory.
The following information pertains to a raw material (SRM), for the month of June
20X3.
(i) Opening inventory of SRM was 100,000 units having a value of Rs. 80 per unit.
(ii) 150,000 units were purchased on June 5, at Rs. 85 per unit
(iii) 150,000 units were issued from stores on June 6.
(iv) 5,000 defective units were returned from the production to the store on June
12.
(v) 150,000 units were purchased on June 15 at Rs. 88.10 per unit.
(vi) On June 17, 50% of the defective units were disposed of as scrap, for
Rs. 20 per unit, because these had been damaged on account of improper
handling at QL.
(vii) On June 18, the remaining defective units were returned to the supplier
for replacement under warranty.
(viii) On June 19, 5,000 units were issued to production in replacement of the
defective units which were returned to store.
(ix) On June 20, the supplier delivered 2,500 units in replacement of the
defective units which had been returned by QL.
(x) 150,000 units were issued from stores on June 21.

(xi) During physical stock count carried out on June 30, 2010 it was noted that
closing inventory of SRM included 500 obsolete units having net realizable
value of Rs. 30 per unit. 4,000 units were found short.

Required
Prepare necessary journal entries to record the above transactions. (15)

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 Question bank: Objective test and long-form questions

5.5 SAPPHIRE LIMITED

(a) Briefly describe the following terms:
(i) Marginal cost
(ii) Stock out cost
(iii) Sunk cost
(iv) Cost unit (06)
(b) Sapphire limited (SL) fabricates parts for auto manufacturers and follows job
order costing. The company’s head office is situated in Lahore but the
factory is in Karachi. A separate set of records is kept at the head office and
at the factory. Following details were extracted from SL’s records for the
month of February 20X4.
Jobs
A B C
Materials issued to production (units)
 Material X 40,000 - 10,000
 Material Y - 75,000 25,000

Direct labour hours worked (hours) 6,000 9,000 15,000
Labour rate per hour (Rs.) 75 60 65
The other related information is as follows:
(i) Materials purchased on account:
 100,000 units of material X at Rs. 25 per unit
 150,000 units of material Y at Rs. 35 per unit
(ii) The head office prepared the payroll and deducted 8% for payroll taxes.
The payroll amounted to Rs. 3.0 million out of which Rs. 1.0 million pertained
to selling and administrative staff salaries. After charging direct labour cost
to each job the balance amount of payroll cost was attributed to general
factory overhead.
(iii) Factory overhead was applied to the jobs at Rs. 25 per direct labour hour.
(iv) Actual factory overheads amounted to Rs. 700,000 including depreciation on
machinery amounting to Rs. 400,000. All payments were made by head office.
(v) Over or under-applied factory overheads are closed to cost of goods sold
account.
(vi) Jobs A and B were completed during the month. Job A was sold for Rs. 2.0
million to one of the auto manufacturer on credit. The customer however,
agreed to settle the transaction at 2% cash discount.
(vii) Selling and administrative expenses, other than salaries paid during the
month were Rs. 500,000.

Required
Prepare journal entries to record all the above transactions in SL’s factory ledger
and general ledger for the month of February 20X4. (16)

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Cost and management accounting

CHAPTER 6 – JOB, BATCH AND SERVICE COSTING

6.1 JOB 6789

A company operates a job costing system. Job number 6789 will require Rs.345 of
direct materials and Rs.210 of direct labour, which is paid Rs.14 per hour.
Production overheads are absorbed at the rate of Rs.30 per direct labour hour and
non-production overheads are absorbed at the rate of 40% of prime cost.

Required
What is the total expected cost of the job?

6.2 AHMER AND COMPANY

Ahmer and Company is engaged in production of engineering parts. It receives bulk
orders from bicycle manufacturers and follows job order costing. On July 1, 20X3
two jobs were in progress whereas two jobs were opened during the year. The
details are as follows:
JOBS
A B C D
Work in process – opening (Rs.) 1,400,000 2,500,000 - -
Raw material issued from stores (Rs.) 800,000 1,200,000 1,500,000 600,000
Direct labour hours worked (Hours) 20,000 30,000 15,000 18,000
Rate of direct labour per hour (Rs.) 20 18 16 15
Other related information is as follows:
(i) Factory overhead is applied to the jobs at Rs. 10 per labour hour.
(ii) Actual factory overheads for the year amounted to Rs. 900,000.
(iii) Under/over applied factory overheads are charged to profit and loss account.
(iv) Job A was completed during the year. All the goods were shipped to the
customers.
(v) Job B was also completed during the year. However, about 10% of the
goods were rejected during inspection. These were transferred to Job C
where they will be used after necessary adjustments.

Required
Prepare journal entries to record all the above transactions. (14)

© Emile Woolf International 26 The Institute of Chartered Accountants of Pakistan