Explain the process of setting a master budget. In your answer pay attention to logical sequence and structure.	[12]

Explain the process of setting a master budget. In your answer pay attention to logical sequence and structure. [12]

COST ACCOUNTING

Instructions to candidates:

a)  Time allowed: Three hours (plus an extra ten minutes’ reading time at the start – do not write anything during this time)

b) Answer any FIVE questions

c) All questions carry equal marks. Marks for each question are shown in [ ]

d) Non-programmable calculators are permitted in this examination

1. a) Explain the process of setting a master budget. In your answer pay attention to logical sequence

and structure.

[12]

b) Enumerate the principal benefits of maintaining a budgetary control system.

[8]


2. Manufacturers Ltd has three production cost centres X, Y and Z and one service cost centre M which is the maintenance department. The budgeted overhead expenditure for the year ended 31 March 2016 is as follows:

 

£000

 

Depreciation of production and maintenance equipment

500

 

Employer’s liability insurance

175

 

Heating and lighting

200

 

Indirect labour

1,000

*

Rent and business rates

800

 

Staff welfare and safety expenses

200

 

 

-------

 

Budgeted overhead expenditure: total

2,875

 

 

=====

 

* To be apportioned on the basis of the number of employees per cost centre. Other data/information is as follows:

Value of production equipment:

 

Cost centre X

£1,000,000

Cost centre Y

£800,000

Cost centre Z

£500,000

Cost centre M

£200,000

Floor area:

 

Cost centre X

80,000 sq. metres

Cost centre Y

60,000 sq. metres

Cost centre Z

50,000 sq. metres

Cost centre M

10,000 sq. metres

Number of employees:

 

Cost centre X

200

Cost centre Y

100

Cost centre Z

80

Cost centre M

20

Overheads to be allocated to cost centre M amount to £55,000.

Cost centre M is to be apportioned 50% to X, 35% to Y and 15% to Z.

Budgeted direct labour hours are:

 

Cost centre X

200,000

Cost centre Y

217,500

Cost centre Z

171,250

Question 2 continues overleaf

TASKS

a)     Prepare an overhead analysis sheet showing:

i. A column stating the overhead expense, e.g. depreciation

ii. A column for each department, e.g. X, Y, Z and M, showing the apportioned expenditure

iii. A total column

iv

a column noting the basis used for calculating the expenditure, e.g. area

[10]

B) Calculate the overhead absorption rates for EACH of the three production cost centres using

budgeted direct labour hours. Round to two decimal places.

[6]

b)    Prepare a cost statement for a product which has a prime cost of £640, and takes 4 hours in cost

centre X, followed by 5 hours in cost centre Y, and 3 hours in cost centre Z.

[4]

3. Al-Ga plc has a limited capital budget available for investment in suitable projects this year, and has shortlisted two possible choices. Details are as follows:

 

Project Alpha

Project Omega

Capital cost

 

£1,750,000

£1,800,000

Expected life

 

5 years

5 years

Residual value

 

nil

nil

Budgeted cash inflows:

£000

£000

Year 1

 

500

600

Year 2

 

950

1,200

Year 3

 

1,300

1,500

Year 4

 

800

600

Year 5

 

300

300

The cost of capital to Al-Ga plc is 9%.

 

Extracts from NPV tables are as follows:

 

Year

8%

9%

10%

1

.926

.917

.909

2

.857

.842

.826

3

.794

.772

.751

4

.735

.708

.683

5

.630


Price: £ 40

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