QUESTION

SECTION A

ANSWER BOTH QUESTIONS

1. The following data relates to Process C, one of a chain of processes in Chemco plc, for the month ended 28 February 2019:

Transfers from Process B                                                 3,400 kg @ £25 per kg

Materials issued from stores                                             600 kg @ £29 per kg

(this material is mixed with transfers from Process B)

Direct wage cost                                                              £15,600

Overhead                                                                         200% of direct labour

Normal losses arise through loss in weight due to chemical change and are estimated to be 20% of mixed input.

Abnormal losses are assumed to be 100% complete.

Closing WIP of 240 kg is two thirds complete in relation to labour and overhead.

There was no opening WIP on 1 February 2019.

Transfers to Process D during November totalled 2,800 kg.

Required:

• Prepare the relevant accounts for Process C for February 2019.

(20)

(b)      When might an organisation use process costing as part of its control process?

(10)

(c)      Distinguish between a joint product and a by-product.

  (5)

(35)

2. Mike Johnston (MJ) manufactures two products, G and C, each of which passes through a common series of automated processes. The following information has been extracted from the production/sales plan for the next month.

The drying process, which is one process of the series of processes which the products undertake, has a maximum capacity of 3,075 hours during the next month and is considered to be a bottle-neck.

Production overhead costs are considered variable.  Per unit costs are estimated based on the overhead cost for the month and the planned production mix assuming 100% capacity utilization.

MJ operates a just-in-time (JIT) production process and aims to hold minimal amounts of inventory.

Required:

• Explain how the principles of throughput accounting differ from those of the traditional marginal costing approach.

(5)

• Using marginal costing principles, calculate the product mix that will maximise profit for the next month.

(10)

• Calculate the throughput accounting ratio and show the product mix that will maximise profit under the throughput accounting approach. Assume that the total variable overheads incurred as a result of the production plan suggested in part (b) are the only fixed costs under the throughput accounting approach.

(15)

• With reference to the throughput accounting ratios, explain how the profitability can be improved.

  (5)

(35)

SECTION B

ANSWER ONE QUESTION

3. Describe the way in which an Activity Based Costing approach to job costing assigns overheads to a product mix. Why is this approach often considered to be an improvement on more traditional methods of job costing?

(15)

4. “Long-term competitive advantage will be undermined in those institutions that cannot respond decisively to agile rivals and rethink their business models for the market of tomorrow.”

(CIMA, 2016, p.13)

Discuss the four Global Management Accounting Principles characterising the ‘Integrated Thinkers’ who bring value to an organisation in today’s business environment.

(15)

SECTION C

ANSWER ONE QUESTION

5. “The implementation of virtually all controls, as well as their adaptation to local or situational circumstances, requires companies to incur some direct out-of-pocket costs. But sometimes, those direct costs are dwarfed by indirect costs caused by any of a number of harmful side effects.”

(Merchant and Van der Stede, 2017)

Required:

Critically discuss the harmful side effects that can occur as a result of ‘controls’ in organisations.

(15)

6. “While the value of a standard costing system in the modern manufacturing environment (to control costs) may be limited, companies have actually responded to the challenge by adapting their standard costing systems rather than abandoning the systems altogether.”

(Sulaiman et al., 2015)

Required:

Discuss the above statement, and explain how the standard costing systems may be modified to take into consideration the changing organisational environment.

(15)

ANSWER

SECTION A

ANSWER BOTH QUESTIONS

Question 1: Prepare the relevant accounts for Process C for February 2019. (20)

To prepare the relevant accounts for Process C in February 2019, we need to calculate the following:

1. Transferred-in costs (Transfers from Process B):

   Transfers from Process B: 3,400 kg @ £25 per kg = £85,000

2. Materials cost:

   Materials issued from stores: 600 kg @ £29 per kg = £17,400

3. Total cost to account for:

   Transferred-in costs + Materials cost = £85,000 + £17,400 = £102,400

4. Equivalent units:

   Equivalent units of production = Transferred-in units + Units started and completed + Closing WIP units

   Transferred-in units = Transfers from Process B = 3,400 kg

   Units started and completed = Materials issued from stores = 600 kg

   Closing WIP units = 240 kg (two thirds complete)

   Equivalent units of production = 3,400 kg + 600 kg + 240 kg = 4,240 kg

5. Cost per equivalent unit:

   Cost per equivalent unit = Total cost to account for / Equivalent units of production

   Cost per equivalent unit = £102,400 / 4,240 kg = £24.15 per kg

6. Cost of units completed and transferred out:

   Cost of units completed and transferred out = Units started and completed x Cost per equivalent unit

   Cost of units completed and transferred out = 600 kg x £24.15 per kg = £14,490

7. Cost of closing WIP:

   Cost of closing WIP = Closing WIP units x Cost per equivalent unit

   Cost of closing WIP = 240 kg x £24.15 per kg = £5,796

8. Total cost accounted for:

   Total cost accounted for = Cost of units completed and transferred out + Cost of closing WIP

   Total cost accounted for = £14,490 + £5,796 = £20,286

Now we can prepare the relevant accounts:

Process C – Account for February 2019

————————————————-

                                                        £

Transferred-in costs                                85,000

Materials cost                                         17,400

Direct wage cost                                      15,600

Overhead (200% of direct labour)            31,200

                                                    ——–

Total cost to account for                         149,200

Less: Cost of units completed and

transferred out                                       14,490

Cost of closing WIP                                   5,796

                                                    ——–

Total cost accounted for                          20,286

                                                    ——–

Question 2: When might an organization use process costing as part of its control process? (10)

Process costing is commonly used by organizations in the following scenarios:

Continuous production: When a company engages in continuous or mass production, where identical products are produced in large quantities over a long period, process costing is an effective method for tracking and allocating costs. Industries such as chemicals, petroleum refining, pharmaceuticals, food processing, etc., often use process costing.

Standardized products: Process costing is suitable for industries that produce standardized or homogeneous products. It allows for the accumulation of costs across multiple production cycles and the averaging of costs per unit.

Multiple processes: When a production process involves multiple interconnected processes, each adding value to the product, process costing helps in assigning costs to each process. This allows management to identify cost inefficiencies, analyze bottlenecks, and optimize the production flow.

Tracking costs in a continuous flow: Process costing is effective in tracking costs incurred in a continuous flow of production.

It provides a systematic way of recording and allocating costs at various stages of the production process, allowing management to analyze the cost structure and identify areas for improvement.

Cost control and decision-making: Process costing provides valuable information for cost control and decision-making purposes. By tracking costs at each stage of the process, management can identify cost variances, monitor cost trends, and make informed decisions regarding pricing, production volumes, process improvements, and resource allocation.

Compliance and financial reporting: Process costing helps in meeting regulatory requirements and preparing accurate financial statements. By accurately capturing and allocating costs, organizations can comply with accounting standards, such as International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP).

Inventory valuation: Process costing facilitates the valuation of work in progress (WIP) and finished goods inventory. It allows organizations to determine the cost of production at different stages and accurately value inventory for financial reporting purposes and cost of goods sold calculations.

Overall, process costing is valuable for organizations involved in continuous, standardized production processes, where cost control, inventory valuation, and decision-making based on cost analysis are crucial. It provides a systematic approach to allocate costs and supports effective control and management of production processes.