Examination No.

_______________________

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2009 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC9: COSTING AND BUDGETARY CONTROL

THURSDAY 11 JUNE 2009 TIME ALLOWED : 3 HOURS

09:00 AM - 12:00 NOON

INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during
which you should read the question paper and, if you wish, make annotations on the
question paper. However, you will not be allowed, under any circumstances, to
open the answer book and start writing or use your calculator during this reading time.

2. FIVE questions ONLY to be answered.

3. Each question carries 20 marks.

4. Show all your workings in order to gain full marks.

5. Marks will be awarded for clarity, correctness and logical presentation.

6. Use of non-programmable calculators is allowed.

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE

INVIGILATOR.

This question paper contains 8 pages

This question paper must not be removed from the examination hall.
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1. MADALITSO MEDICAL CLINIC offers a number of specialized medical

services. The clinic recently added a 20 bed maternity wing.

Since the clinic has no experience with in-patient maternity services, it decided to
operate the wing for two months before determining how much to charge per
patient-day on an ongoing basis. As a temporary measure, it adopted a patient-
day charge of K10,000, an amount equal to the fees charged by a hospital
specializing in maternity care in the city.

This initial per-day charge was quoted to patients entering the wing during the
first two months with assurances that if the actual operating costs justified it, the
charge could be reduced.

The maternity wing opened on 1 January 2009. During January, the wing had
2,100 patient-days of activity. During February, the activity was 2,250 patient-
days. Costs for the two levels of activity output are as follows:

2,100 Patient-Days 2,250 Patient-Days

Salaries, nurses 600,000 600,000
Assistants 120,000 120,000
Laboratory 11,000,000 11,750,000
Pharmacy 3,100,000 3,250,000
Depreciation 1,180,000 1,180,000
Laundry 1,680,000 1,800,000
Administration 1,200,000 1,200,000
Equipment hire 3,000,000 3,000,000

Required

(a) Classify each cost as fixed, variable or mixed, using patient-days as the
activity driver. 4 Marks

(b) Use the high-low method to separate the mixed costs into fixed and
variable. 6 Marks

(c) The administrator of the maternity wing has estimated that the centre will
average 2,000 patient-days per month.

If the wing is to be operated as a non-profit organization, how much will it

need to charge per patient-day? 6 Marks

(d) Assume the wing averages 2,500 patient days per month.

How much would need to be charged per patient–day for the wing to
cover its costs? 2 Marks
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(e) Explain why the charge per patient-day decreased as the activity output
increased. 2
Marks
(TOTAL: 20 MARKS)

Continued/……
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2. MATABWA LIMITED trade in a single product and maintain a perpetual

inventory. The company has valued its stock on the LIFO basis, but is now
considering a change to the FIFO method.

Their records disclose that 2,000 units were in inventory at the beginning of the
current period. They have been valued on the basis of a receipt of 5,000 units
priced at K25.00 of which 4,000 had been sold before the end of the period, plus
500 from a delivery in October 2008 when the cost was K20.00 per unit, plus 500
purchased in July 2007 when the cost was K5.00 per unit.

The following transactions took place in the period January to June 2009:

Purchases Sales
January 1,500 units at K40.00 each
February 10,000 units at K25.00 each
March 8,000 units at K40.00 each
April 15,000 units at K26.00 each
May 6,500 units at K27.00 each
June 22,000 units at K40.00 each

Required

(a) Calculate the inventory valuation at 30 June 2009 using:

(i) the LIFO method; 6 Marks

(ii) the FIFO method. 6 Marks

(b) Calculate the trading profit for the period January to June 2009 using both
methods of valuation for opening and closing inventories. 6 Marks

(c) Explain the possible reasoning behind the company’s decision to change
to the FIFO method at the present time. 2 Marks
(TOTAL: 20 MARKS)

Continued/……
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3. UMOYO AGENCIES employs a full-absorption costing system for its external

reporting as well as for internal management purposes. The latest annual income
statement appears as follows:
K K
Sales revenue 415,000
Cost of goods sold:
Opening finished goods inventory 22,000
Production 315,000
Closing finished goods inventory (86,000)
(251,000)
Gross profit 164,000
Marketing costs 83,000
Administrative costs 49,800
Operating profit 31,200

Management is concerned that although they are showing adequate income, there
has been a shortage of cash to meet operating costs. The following information
has been provided to assist management with its evaluation of the situation:

Statement of production cost

K K
Direct materials:
Opening raw materials inventory 16,000
Purchases 62,000
Closing raw materials inventory (22,000) 56,000

Direct labour 125,100

Production overhead:
Variable 39,400
Fixed 94,500
315,000

There are no work-in-progress inventories. This year, management is pleased that

production costs are 70% variable compared to last year, when they were only
45% variable. While 80% of the marketing costs are variable, only 40% of the
administrative costs are considered variable.

Required:

(a) Prepare a marginal costing income statement for the year. 14 Marks

(b) Reconcile the difference between the full absorption costing operating
profit given above with the marginal costing operating profit calculated in
(a) above. 6 Marks
(TOTAL= 20 MARKS)
Continued/……
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4. (a) A company uses the FIFO method to account for its work-in-progress
inventories. The accounting records show the following information:

Opening work-in-progress inventory comprised of 300 units as follows:

Cost Degree of completion
K %
Direct materials 360 60
Conversion costs 108 30

The following costs were incurred during the period in respect of 2,000
units started during the period.
K
Direct materials 3,714
Conversion costs 2,258

Closing inventory of work-in-progress amounted to 600 units which were

40% complete with respect to direct materials and 20% complete with
respect to conversion costs.

Required:

Calculate the cost per equivalent unit for:

(i) direct materials; 6 Marks
(ii) conversion costs. 6 Marks

(b) Describe any two distinguishing features of process costing. 4 Marks

(c) Define and state the significance of an equivalent unit. 4 Marks
(TOTAL = 20 MARKS)

Continued/……
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5. (a) AUNT MWAYI buys plain balloons and prints different designs on them
for various occasions. The plain balloons are imported so a stock
equal to the balloons needed for two months’ sales should be kept
on hand at all times. Plain balloons cost K13.50 each and must
be paid for in cash. There are 14,000 plain balloons in stock.
Sales estimates, based on contracts received, are as follows for
the next 6 months:
July August September October November December
5,500 8,900 6,600 7,100 4,500 3,600
Required:
(i) Estimate purchase quantities for July to October. 8 Marks
(ii) Estimate the cash required to make purchases in July to October.
4
Marks
(b) (i) Define the principal budget factor and describe its importance in
the budgetary planning process. 4
Marks
(ii) What is a cash budget and why is it important? 4 Marks
(TOTAL = 20 MARKS)

Continued/……
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6. The Makata plant of CHEMICALS LIMITED produces an industrial chemical.

At the beginning of the year, the plant had the following standard cost card:
K
Direct materials (10kg @ $16.00 per kg) 160.00
Direct materials (0.75hr @ $180.00 per hr) 135.00
Variable overhead (0.75 hr @ $30.00 per hr) 22.50
Fixed overhead (0.75 hr @ $40.00 per hr) 30.00
Standard cost per unit 347.50

The plant calculates its overhead rates using practical capacity which is 7,200
units. The actual results for the year are as follows:

(i) 7,000 units were produced.

(ii) 74,400 kg of direct materials were purchased at K15.00 per kg.
(iii) 73,600 kg of direct materials were used.
(iv) 5,600 hours of direct labour were worked at a rate of K179.00 per hour.
(v) Variable overhead amounted to K175,400.
(vi) Fixed overhead amounting to K214,000 was incurred.

Required:

(a) Calculate the following variances:

(i) Price and usage variances for direct materials. 4 Marks

(i) Direct labour rate and direct labour efficiency variances. 4 Marks
(ii) Variable overhead expenditure and efficiency variances. 4 Marks
(iii) Fixed overhead expenditure and volume variance. 4 Marks

(b) What does the fixed overhead volume variance mean? 4 Marks
(TOTAL: 20 MARKS)
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Continued/…..

7. (a) Outline two similarities and two differences between budgets and
standards. 4 Marks

(b) List four possible uses of standard costing. 4 Marks

(c) Describe how the budget manual and the budget committee can assist in
the administration of the budgeting process. 6
Marks

(d) Explain how zero base budgeting techniques differ from incremental
budgeting. 6 Marks
(TOTAL : 20 MARKS)

END