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Colin Drury
Cost and
Management
Accounting
Sixth Edition
Students’
Manual
Australia •Canada •Mexico •Singapore •Spain •United Kingdom •United States
Cost and Management Accounting 6e: Students Manual
Colin Drury
Publishing Director Publisher Development Editor
John Yates Patrick Bond Thomas Rennie
Production Editor Manufacturing Manager Marketing Manager
Alissa Chappell Helen Mason Katie Thorn
Typesetter Production Controller
Saxon Graphics, Derby Maeve Healy
Copyright © 2006 Colin Drury
The Thomson logo is a registered
trademark used herein under licence.
For more information, contact
Thomson Learning, High Holborn
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the World Wide Web at:
http://www.thomsonlearning.co.uk
This edition published 2006 by
Thomson Learning.
All rights reserved by Thomson
Learning 2006. The text of this
publication, or any part thereof,
may not be reproduced or
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While the publisher has taken all
reasonable care in the preparation
of this book the publisher makes no
representation, express or implied,
with regard to the accuracy of the
information contained in this book
and cannot accept any legal
responsibility or liability for any
errors or omissions from the book
or the consequences thereof.
Products and services that are
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either trademarks and/or registered
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owners. The publisher and author/s
make no claim to these trademarks.
British Library Cataloguing-in-
Publication Data
A catalogue record for this book is
available from the British Library
Contents
Part 1: Questions 1
An introduction to cost terms and concepts 3
Accounting for direct costs 5
Cost assignment for indirect costs 9
Accounting entries for a job costing system 14
Process costing 19
Joint and by-product costing 23
Income effects of alternative cost accumulation systems 27
Cost-volume-profit analysis 30
Cost estimation and cost behaviour 35
Measuring relevant costs and revenues for decision-making 37
The application of linear programming to management accounting 42
Activity-based costing 44
Decision-making under conditions of risk and uncertainty 47
Capital investment decisions 49
The budgeting process 52
Management control systems 55
Standard costing and variance analysis 61
Part 2: Solutions 65
An introduction to cost terms and concepts 67
Accounting for direct costs 70
Cost assignment for indirect costs 76
Accounting entries for a job costing system 82
Process costing 89
Joint and by-product costing 97
Income effects of alternative cost accumulation systems 102
Cost-volume-profit analysis 108
Cost estimation and cost behaviour 115
Measuring relevant costs and revenues for decision-making 117
The application of linear programming to management accounting 122
Activity-based costing 126
Decision-making under conditions of risk and uncertainty 131
Capital investment decisions 134
The budgeting process 138
Management control systems 142
Standard costing and variance analysis 148
Part I
Questions
(i) Costs may be classified in a number of ways including classification by behav-
iour, by function, by expense type, by controllability and by relevance.
(ii) Management accounting should assist in EACH of the planning, control and
decision making processes in an organisation.
Discuss the ways in which relationships between statements (i) and (ii) are relevant
in the design of an effective management accounting system.
(15 marks)
ACCA Information for Control and Decision Making
(a) ‘Discretionary costs are troublesome because managers usually find it difficult
to separate and quantify the results of their use in the business, as compared
with variable and other fixed costs.’
You are required to discuss the above statement and include in your answer
the meaning of discretionary costs, variable costs and fixed costs; give two
illustrations of each of these three named costs.
(12 marks)
(b) A drug company has initiated a research project which is intended to develop a
new product. Expenditures to date on this particular research total £500 000 but
it is now estimated that a further £200 000 will need to be spent before the
product can be marketed. Over the estimated life of the product the profit
potential has a net present value of £350 000.
You are required to advise management whether they should continue or
abandon the project. Support your conclusion with a numerate statement and
state what kind of cost is the £500 000.
(5 marks)
(c) Opportunity costs and notional costs are not recognised by financial accounting
systems but need to be considered in many decisions taken by management.
You are required to explain briefly the meanings of opportunity costs and
notional costs; give two examples of each to illustrate the meanings you have
attached to them.
(8 marks)
(Total 25 marks)
CIMA Stage 2 Cost Accounting
(a) Distinguish between ‘opportunity cost’ and ‘out of pocket cost’ giving a
numerical example of each using your own figures to support your answer.
(6 marks)
(b) Jason travels to work by train to his 5-days a week job. Instead of buying daily
tickets he finds it cheaper to buy a quarterly season ticket which costs £188 for
13 weeks.
Debbie, an acquaintance, who also makes the same journey, suggests that
they both travel in Jason’s car and offers to give him £120 each quarter towards
his car expenses. Except for weekend travelling and using it for local college
Question SM 2.1
Question SM 2.2
Question SM 2.3
Relevant costs
and cost
behaviour
AN INTRODUCTION TO COST TERMS AND CONCEPTS 3
An introduction to cost terms and
concepts
attendance near his home on three evenings each week to study for his CIMA
Stage 2, the car remains in Jason’s garage.
Jason estimates that using his car for work would involve him, each quarter,
in the following expenses:
(£)
Depreciation (proportion of annual figure) 200
Petrol and oil 128
Tyres and miscellaneous 52
You are required to state whether Jason should accept Debbie’s offer and to
draft a statement to show clearly the monetary effect of your conclusion.
(5 marks)
(c) A company with a financial year 1 September to 31 August prepared a sales
budget which resulted in the following cost structure:
% of sales
Direct materials 32
Direct wages 18
Production overhead: variable 6
fixed 24
Administrative and selling costs: variable 3
fixed 7
Profit 10
After ten weeks, however, it became obvious that the sales budget was too
optimistic and it has now been estimated that because of a reduction in sales
volume, for the full year, sales will total £2 560 000 which is only 80% of the
previously budgeted figure.
You are required to present a statement for management showing the
amended sales and cost structure in £s and percentages, in a marginal
costing format.
(4 marks)
(Total 15 marks)
CIMA Stage 2 Cost Accounting
4AN INTRODUCTION TO COST TERMS AND CONCEPTS
A company currently remunerates its factory workers on a time basis and is now
considering the introduction of alternative methods of remuneration. The follow-
ing information relates to two employees for one week:
YZ
Hours worked 44 40
Rate of pay per hour £3.50 £4.50
Units of output achieved 480 390
The time allowed for each unit of output is seven standard minutes. For purposes
of piecework calculations each minute is valued at £0.05.
Required:
(a) Calculate the earnings of each employee where earnings are based on:
(i) piecework rates with earnings guaranteed at 80% of pay calculated on an
hourly basis; (4 marks)
(ii) premium bonus scheme in which bonus (based on 75% of time saved) is
added to pay calculated on an hourly basis. (3 marks)
(b) Describe two situations in which the time basis of remuneration is likely to be
more appropriate than piecework schemes. (4 marks)
(Total 11 marks)
AAT Cost Accounting and Budgeting
(a) Describe the characteristics of factory direct and indirect labour cost and
explain the treatment of factory overtime wages and holiday pay in cost
accounting systems. (9 marks)
(b) A Ltd makes engineering components. The company has been manufacturing
6000 components per week, with six direct employees working a 40-hour week,
at a basic wage of £4.00 per hour. Each worker operates independently.
A new remuneration scheme is being introduced. Each employee will receive pay-
ment on the following basis:
first 800 components per week – 16 pence per unit
next 200 17
all additional 18
There will be a guaranteed minimum wage of £140 per week. It is expected that
output will increase to 6600 components per week with the new scheme.
Required:
Describe the general features of time-based and individual-performance-based
remuneration systems, and outline the relative merits of each type of system. (Use
the above figures to illustrate your discussion, making whatever additional
assumptions that you feel are necessary.) (16 marks)
(Total 25 marks)
ACCA Level 1 Costing
Question SM 3.1
Calculation of
earnings
Question SM 3.2
Calculation of
earnings and a
discussion of
time-based and
individual
performance-
based
remuneration
systems
ACCOUNTING FOR DIRECT COSTS 5
Accounting for direct costs
X Ltd has an average of 42 workers employed in one of its factories in a period dur-
ing which 7 workers left and were replaced.
The company pays a basic rate of £4.60 per hour to all its direct personnel. This is
used as the standard rate. In addition, a factory-wide bonus scheme is in operation.
A bonus of half of the efficiency ratio in excess of 100% is added as a percentage to
the basic hourly rate, e.g. if the efficiency ratio is 110% then the hourly rate is £4.83
(i.e. £4.60 + (£4.60 × 5%)).
During the period 114 268 units of the company’s single product were manufac-
tured in 4900 hours. The standard hour is 22 units.
Required:
(a) Calculate the labour turnover percentage for the period. (3 marks)
(b) Identify the reasons for, and cost of, labour turnover, and discuss how it may
be reduced (12 marks)
(c) Calculate the hourly wage rate paid for the period, and the total labour variance.
(10 marks)
(Total 25 marks)
ACAA Cost and Management Accounting I
(a) Explain how the following cost items, relating to direct personnel, would be
processed in a manufacturing business’s cost accounts:
(i) idle time; (3 marks)
(ii) overtime. (3 marks)
(b) The following information is available regarding the labour costs in a factory
department for a week:
Direct personnel Indirect personnel
Payroll hours:
Production 432 117
Training 24 —
Idle time 32 4
Total 488 121
Rates per hour:
Basic £7.50 £6.00
Overtime premium £2.50 £2.00
The following additional information is provided:
(i) There are 12 direct personnel and 3 indirect personnel in the department.
(ii) Group bonuses for the week, shared by all workers in the department,
total £520.
(iii) The basic wage rates apply to a normal working week of 37 hours.
(iv) Overtime is worked in order to meet the general requirements of production.
(v) The idle time and the time spent training during the week are regarded as
normal.
(vi) The expected number of payroll hours of direct personnel in the week
(excluding time spent training), required to produce the output achieved,
is 470.
Required:
(i) Calculate the total amounts paid in the week (before share of group bonus) to
direct personnel and indirect personnel respectively. (4 marks)
(ii) Determine the total amounts to be charged as direct wages and indirect
wages respectively. (5 marks)
(iii) Complete the Wages Control Account in the company’s separate cost account-
ing system, clearly indicating the account in which each corresponding entry
would be made. (3 marks)
Question SM 3.3
Calculation of
labour turnover
and efficiency
ratio
Question SM 3.4
Computation of
earnings and
analysis by direct
and indirect
categories
6ACCOUNTING FOR DIRECT COSTS
(iv) Calculate the efficiency ratio relating to the direct personnel (expressed as a
percentage to one decimal place). (2 marks)
(Total 20 marks)
ACCA Management Information – Paper 3
On 1 January Mr G started a small business selling a special yarn. He invested his
savings of £40 000 in the business and during the next six months the following
transactions occurred:
Yarn Yarn
purchases Total sales Total
Date of quantity cost Date of quantity value
receipt (box) (£) despatch (box) (£)
13 Jan 200 7 200 10 Feb 500 25 000
8 Feb 400 15 200
11 Mar 600 24 000 20 Apr 600 27 000
12 Apr 400 14 000
15 June 500 14 000 25 June 400 15 200
The yarn is stored in premises Mr G has rented, and the closing stock of yarn,
counted on 30 June, was 500 boxes.
Other expenses incurred, and paid in cash, during the six-month period
amounted to £2300.
Required:
(a) Calculate the value of the material issues during the six-month period, and
the value of the closing stock at the end of June, using the following methods
of pricing:
(i) first in, first out;
(ii) last in, last out;
(iii) weighted average (calculations to two decimal places only). (10 marks)
(b) Calculate and discuss the effect each of the three methods of material pricing
will have on the reported profit of the business, and examine the performance
of the business during the first six-month period. (12 marks)
(Total 22 marks)
ACCA Level 1 Costing
(a) Write short notes to explain each of the following in the context of materials
control:
(i) Continuous stocktaking.
(ii) Perpetual inventory system.
(iii) ABC inventory analysis. (9 marks)
(b) State the factors that should influence the decision regarding economic order
quantities of raw materials. (7 marks)
(c) Calculate three normal control levels, which may be used in stock control sys-
tems, from the following information for a particular raw material:
Economic order quantity, 12 000 kilos
Lead time, 10 to 14 working days
Average usage, 600 kilos per day
Minimum usage, 400 kilos per day
Maximum usage, 800 kilos per day (9 marks)
(Total 25 marks)
ACCA Level 1 Costing
Question SM 3.5
Stores pricing
Question SM 3.6
ACCOUNTING FOR DIRECT COSTS 7
A large local government authority places orders for various stationery items at
quarterly intervals.
In respect of an item of stock coded A32, data are:
annual usage quantity 5000 boxes
minimum order quantity 500 boxes
cost per box £2
Usage of material is on a regular basis and on average, half of the amount pur-
chased is held in inventory. The cost of storage is considered to be 25% of the
inventory value. The average cost of placing an order is estimated at £12.50.
The chief executive of the authority has asked you to review the present situa-
tion and to consider possible ways of effecting cost savings. You are required to:
(a) tabulate the costs of storage and ordering item A32 for each level of orders
from four to twelve placed per year;
(b) ascertain from the tabulation the number of orders which should be placed in a
year to minimize these costs;
(c) produce a formula to calculate the order level which would minimize these
costs – your answer should explain each constituent part of the formula and
their relationships;
(d) give an example of the use of the formula to confirm the calculation in (b) above;
(e) calculate the percentage saving on the annual cost which could be made by
using the economic order quantity system;
(f) suggest two other approaches which could be introduced in order to reduce the
present cost of storage and ordering of stationery.
(25 marks)
CIMA Cost Accounting 2
A company is reviewing its stock policy, and has the following alternatives avail-
able for the evaluation of stock number 12 789:
(i) Purchase stock twice monthly, 100 units
(ii) Purchase monthly, 200 units
(iii) Purchase every three months, 600 units
(iv) Purchase six monthly, 1200 units
(v) Purchase annually, 2400 units.
It is ascertained that the purchase price per unit is £0.80 for deliveries up to 500 units.
A 5% discount is offered by the supplier on the whole order where deliveries are 501
up to 1000, and 10% reduction on the total order for deliveries in excess of 1000.
Each purchase order incurs administration costs of £5.
Storage, interest on capital and other costs are £0.25 per unit of average stock
quantity held.
You are required to advise management on the optimum order size.
(9 marks)
AAT
Question SM 3.7
Economic order
quantity
Question SM 3.8
Calculation of
optimum order
size
8ACCOUNTING FOR DIRECT COSTS
Knowing that you are studying for the CIMA qualification, a friend who manages a
small business has sought your advice about how to produce quotations in
response to the enquiries which her business receives. Her business is sheet metal
fabrication – supplying ducting for dust extraction and air conditioning installa-
tions. She believes that she has lost orders recently through the use of a job cost
estimating system which was introduced, on the advice of her auditors, seven
years ago. You are invited to review this system.
Upon investigation, you find that a plant-wide percentage of 125% is added to
prime costs in order to arrive at a selling price. The percentage added is intended to
cover all overheads for the three production departments (Departments P, Q and
R), all the selling, distribution and administration costs, and the profit.
You also discover that the selling, distribution and administration costs equate to
roughly 20% of total production costs, and that to achieve the desired return on
capital employed, a margin of 20% of sales value is necessary.
You recommend an analysis of overhead cost items be undertaken with the
objective of determining a direct labour hour rate of overhead absorption for each
of the three departments work passes through. (You think about activity-based
costing but feel this would be too sophisticated and difficult to introduce at the
present time.)
There are 50 direct workers in the business plus 5 indirect production people.
From the books, records and some measuring, you ascertain the following infor-
mation which will enable you to compile an overhead analysis spreadsheet, and to
determine overhead absorption rates per direct labour hour for departmental over-
head purposes:
Cost/expense Annual Basis for
amount apportionment
where allocation
not given
£
Repairs and maintenance 62 000 Technical assessment:
P £42 000, Q £10 000, R £10 000
Depreciation 40 000 Cost of plant and equipment
Consumable supplies 9 000 Direct labour hours
Wage-related costs 87 000 12.5% of direct wages costs
Indirect labour 90 000 Direct labour hours
Canteen/rest/smoke room 30 000 Number of direct workers
Business rates and insurance 26 000 Floor area
Question SM 4.1
Overhead
analysis,
calculation of
overhead rates
and a product
cost
COST ASSIGNMENT FOR INDIRECT COSTS 9
Cost assignment for indirect costs
Other estimates/information
Department Department Department
PQR
Estimated direct labour hours 50 000 30 000 20 000
Direct wages costs £386 000 £210 000 £100 000
Number of direct workers 25 15 10
Floor area in square metres 5 000 4 000 1 000
Plant and equipment, at cost £170 000 £140 000 £90 000
Required:
(a) Calculate the overhead absorption rates for each department, based on direct
labour hours. (9 marks)
(b) Prepare a sample quotation for Job 976, utilising information given in the ques-
tion, your answer to (a) above, and the following additional information:
Estimated direct material cost: £800
Estimated direct labour hours: 30 in Department P
10 in Department Q
5 in Department R
(3 marks)
(c) Calculate what would have been quoted for Job 976 under the ‘auditors’ sys-
tem’ and comment on whether your friend’s suspicions about lost business
could be correct. (3 marks)
(Total 15 marks)
CIMA Stage 2 Cost Accounting
DC Limited is an engineering company which uses job costing to attribute costs to
individual products and services provided to its customers. It has commenced the
Question SM 4.2
Calculation of
