Topic: Cost Segregation and Estimation

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  • 20 Marks

IMAC – MAR 2023 – L1 – Q5 – Budgeting | Cost Segregation and Estimation

Explain cost estimation in budgeting, prepare sales and production budgets, and calculate variable and fixed overheads using the high-low method.

a) Cost estimation techniques play an important role in budget preparation.

Required:
Explain the statement above. (3 marks)

b) Obsaw Ltd is in the process of preparing budgets for the year 2021. Based on past experience, the following trend equation has been developed in the year 2019 for the estimation of quarterly sales:

S = 21,900 + 900Q
Where, S = quarterly sales in units
Q = time period (Quarter I of year 2019 is time period 1)

The following set of seasonal variation index values has been derived using a multiplicative model, based on year 2019 actual sales:

Quarter of the calendar year Q1 Q2 Q3 Q4
Seasonality -30% -10% +30% +10%

The management expects that the above trend and seasonal effect will continue until year 2023.
The company’s policy is to maintain a finished goods inventory of 20% of the demand for the following month. Monthly sales in each quarter are evenly distributed.

Required:
i) Prepare the quarterly sales budget (in units) for the calendar year 2021. (4 marks)
ii) Prepare the quarterly production budget (in units) for the calendar year 2021. (3 marks)

c) Obsaw Ltd recorded the highest and the lowest production overheads (POHs) during the year 2020 as follows:

Production (units) POHs (GH¢ million)
Highest 37,000
Lowest 18,000

POHs are expected to increase by 10% per year and fixed production overheads are absorbed to products based on the budgeted production.

Required:
i) Using the high-low method, prepare the quarterly variable production overheads budget for the year 2021. (Use the production budget in b) ii) above.) (3 marks)
ii) Calculate the fixed production overheads absorption rate per unit for the year 2021. (2 marks)

d) Explain how standard costs for material and labour might be compiled. (5 marks)

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  • 20 Marks

IMAC – DEC 2022 – L1 – Q5 – Cost Segregation and Estimation | Cost-Volume-Profit (CVP) Analysis

Estimation of fixed and variable costs using linear regression and discussion of assumptions underlying Cost-Volume-Profit (CVP) analysis.

a) Total production costs each week in a production department have been measured for the past five weeks, as follows:

Week Units Produced Total Cost (GH¢000)
1 5 20
2 9 27
3 4 17
4 5 19
5 6 23

Required:
i) Use linear regression analysis to obtain an estimate of fixed costs per week and the variable cost of production per unit (see formula table). (8 marks)
ii) Use your results to estimate total costs in a week when 8 units are produced. (3 marks)
iii) Explain why the regression analysis method of separating cost is considered more accurate than the high-low method. (4 marks)

b) The cost-volume-profit (CVP) analysis, also commonly known as breakeven analysis, looks to determine the breakeven point for different sales volumes and cost structures, which can be useful for managers making short-term business decisions. For CVP analysis to be effective, several assumptions are usually made.

Required:
State FOUR (4) assumptions underlying cost-volume-profit (CVP) analysis. (5 marks)

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  • 20 Marks

IMAC – April 2022 – L1 – Q3 – Cost Segregation and Estimation | Process Costing

Determination of prime and full costs of living room furniture and features of a process costing system.

a) Frankadua Furniture Works located at Bomaa in the Ahafo Region has a rough estimate of the materials and labour cost of a set of living room furniture. It is expected that 8 cubic metres of timber, 6 cubic metres of foam and 12 square metres of fabric can be used. Glue, screws and other accessories will also cost GH¢80.

The Carpenters who will do the cutting, joining and finishing will use 35 hours. Since the company is fairly new, it will engage a tailor to sew the fabric to fit the sizes of the units of the chairs. For each set the tailor will charge GH¢150. Labour is paid at GH¢12 per hour plus a premium of GH¢5 per hour when the job requires more than 20 hours.

Timber is priced at GH¢25 per cubic metre, foam is GH¢20 per cubic metre while the fabric is GH¢15 per square metre. The Accountant has estimated overhead absorption rate of 20% on direct material cost.

Required:
i) Determine the prime cost of a set of living room furniture. (10 marks)
ii) Determine the full cost of a set of living room furniture. (5 marks)

b) Kempion Breweries Ltd has just commenced business in the alcoholic beverage sector of Ghana producing a local gin called Pitoo and is desirous of having a good grasp of its costs for product costing, valuation and pricing purposes.

Required:
State FOUR (4) features of a process costing system to be used by Kempion Breweries to arrive at the total cost of Pitoo. (5 marks)

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  • 20 Marks

IMAC – MAY 2021 – L1 – Q5 – Cost Segregation and Estimation | Forecasting | Standard Costing and Variance Analysis

Apportionment of service center costs to production departments and calculation of direct materials price variance.

a) A company is preparing its annual budget and it is estimating the number of units of Product W that would be sold in each quarter of year 2. Past experience has shown that the trend for sales of the product is represented by the following relationship:

y = a + bx where: y = quantity of sales units in the quarter a = 15,000 b = 3,000 x = the quarter number where 1 = quarter 1 of year 1

Actual sales of Product W in year 1 were affected by seasonal variations and were as follows:

Quarter Actual Sales Units
1 20,250
2 19,425
3 25,200
4 24,300

Required: Calculate the expected unit sales of Product W for each quarter of year 2, after adjusting for seasonal variations using the multiplicative model. (6 marks)

b) The records of direct labour hours and total factory overhead cost of Cooper Limited over the first six months of its operations are given below:

Month Direct Labour Hours Total Factory Overheads (GH¢000)
September 50,000 14,800
October 80,000 17,000
November 120,000 23,800
December 40,000 11,900
January 100,000 22,100
February 60,000 16,150

Management is interested in distinguishing between the fixed and variable portions of the overheads.

Required: Using the least square regression method, estimate the variable cost per direct labour hour and the total fixed cost per month. (9 marks)

c) State and explain the methods used in setting: i) Direct Material Cost Standard. (2.5 marks) ii) Direct Labour Cost Standard. (2.5 marks)

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  • 20 Marks

IMAC – MAR 2023 – L1 – Q5 – Budgeting | Cost Segregation and Estimation

Explain cost estimation in budgeting, prepare sales and production budgets, and calculate variable and fixed overheads using the high-low method.

a) Cost estimation techniques play an important role in budget preparation.

Required:
Explain the statement above. (3 marks)

b) Obsaw Ltd is in the process of preparing budgets for the year 2021. Based on past experience, the following trend equation has been developed in the year 2019 for the estimation of quarterly sales:

S = 21,900 + 900Q
Where, S = quarterly sales in units
Q = time period (Quarter I of year 2019 is time period 1)

The following set of seasonal variation index values has been derived using a multiplicative model, based on year 2019 actual sales:

Quarter of the calendar year Q1 Q2 Q3 Q4
Seasonality -30% -10% +30% +10%

The management expects that the above trend and seasonal effect will continue until year 2023.
The company’s policy is to maintain a finished goods inventory of 20% of the demand for the following month. Monthly sales in each quarter are evenly distributed.

Required:
i) Prepare the quarterly sales budget (in units) for the calendar year 2021. (4 marks)
ii) Prepare the quarterly production budget (in units) for the calendar year 2021. (3 marks)

c) Obsaw Ltd recorded the highest and the lowest production overheads (POHs) during the year 2020 as follows:

Production (units) POHs (GH¢ million)
Highest 37,000
Lowest 18,000

POHs are expected to increase by 10% per year and fixed production overheads are absorbed to products based on the budgeted production.

Required:
i) Using the high-low method, prepare the quarterly variable production overheads budget for the year 2021. (Use the production budget in b) ii) above.) (3 marks)
ii) Calculate the fixed production overheads absorption rate per unit for the year 2021. (2 marks)

d) Explain how standard costs for material and labour might be compiled. (5 marks)

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  • 20 Marks

IMAC – DEC 2022 – L1 – Q5 – Cost Segregation and Estimation | Cost-Volume-Profit (CVP) Analysis

Estimation of fixed and variable costs using linear regression and discussion of assumptions underlying Cost-Volume-Profit (CVP) analysis.

a) Total production costs each week in a production department have been measured for the past five weeks, as follows:

Week Units Produced Total Cost (GH¢000)
1 5 20
2 9 27
3 4 17
4 5 19
5 6 23

Required:
i) Use linear regression analysis to obtain an estimate of fixed costs per week and the variable cost of production per unit (see formula table). (8 marks)
ii) Use your results to estimate total costs in a week when 8 units are produced. (3 marks)
iii) Explain why the regression analysis method of separating cost is considered more accurate than the high-low method. (4 marks)

b) The cost-volume-profit (CVP) analysis, also commonly known as breakeven analysis, looks to determine the breakeven point for different sales volumes and cost structures, which can be useful for managers making short-term business decisions. For CVP analysis to be effective, several assumptions are usually made.

Required:
State FOUR (4) assumptions underlying cost-volume-profit (CVP) analysis. (5 marks)

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  • 20 Marks

IMAC – April 2022 – L1 – Q3 – Cost Segregation and Estimation | Process Costing

Determination of prime and full costs of living room furniture and features of a process costing system.

a) Frankadua Furniture Works located at Bomaa in the Ahafo Region has a rough estimate of the materials and labour cost of a set of living room furniture. It is expected that 8 cubic metres of timber, 6 cubic metres of foam and 12 square metres of fabric can be used. Glue, screws and other accessories will also cost GH¢80.

The Carpenters who will do the cutting, joining and finishing will use 35 hours. Since the company is fairly new, it will engage a tailor to sew the fabric to fit the sizes of the units of the chairs. For each set the tailor will charge GH¢150. Labour is paid at GH¢12 per hour plus a premium of GH¢5 per hour when the job requires more than 20 hours.

Timber is priced at GH¢25 per cubic metre, foam is GH¢20 per cubic metre while the fabric is GH¢15 per square metre. The Accountant has estimated overhead absorption rate of 20% on direct material cost.

Required:
i) Determine the prime cost of a set of living room furniture. (10 marks)
ii) Determine the full cost of a set of living room furniture. (5 marks)

b) Kempion Breweries Ltd has just commenced business in the alcoholic beverage sector of Ghana producing a local gin called Pitoo and is desirous of having a good grasp of its costs for product costing, valuation and pricing purposes.

Required:
State FOUR (4) features of a process costing system to be used by Kempion Breweries to arrive at the total cost of Pitoo. (5 marks)

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You're reporting an error for "IMAC – April 2022 – L1 – Q3 – Cost Segregation and Estimation | Process Costing"

  • 20 Marks

IMAC – MAY 2021 – L1 – Q5 – Cost Segregation and Estimation | Forecasting | Standard Costing and Variance Analysis

Apportionment of service center costs to production departments and calculation of direct materials price variance.

a) A company is preparing its annual budget and it is estimating the number of units of Product W that would be sold in each quarter of year 2. Past experience has shown that the trend for sales of the product is represented by the following relationship:

y = a + bx where: y = quantity of sales units in the quarter a = 15,000 b = 3,000 x = the quarter number where 1 = quarter 1 of year 1

Actual sales of Product W in year 1 were affected by seasonal variations and were as follows:

Quarter Actual Sales Units
1 20,250
2 19,425
3 25,200
4 24,300

Required: Calculate the expected unit sales of Product W for each quarter of year 2, after adjusting for seasonal variations using the multiplicative model. (6 marks)

b) The records of direct labour hours and total factory overhead cost of Cooper Limited over the first six months of its operations are given below:

Month Direct Labour Hours Total Factory Overheads (GH¢000)
September 50,000 14,800
October 80,000 17,000
November 120,000 23,800
December 40,000 11,900
January 100,000 22,100
February 60,000 16,150

Management is interested in distinguishing between the fixed and variable portions of the overheads.

Required: Using the least square regression method, estimate the variable cost per direct labour hour and the total fixed cost per month. (9 marks)

c) State and explain the methods used in setting: i) Direct Material Cost Standard. (2.5 marks) ii) Direct Labour Cost Standard. (2.5 marks)

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