Practice Questions

Practice Questions: Cost Accounting

This practice set covers all three parts of Chapter 7 Cost Accounting: types of cost and Work in Progress, the Manufacturing Account, and Break-Even Analysis. Try each question on your own before checking the short worked answers.

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How to practise effectively

Read each question carefully and first identify whether it asks for cost-component calculations, a Manufacturing Account, or Break-Even Analysis, because each type needs a different formula.
Separate direct costs (those traceable straight to the product, such as direct materials and direct labour) from indirect costs or overheads, so that Prime Cost and Overhead Cost are computed accurately.
For questions involving Work in Progress, always add Opening Work in Progress and subtract Closing Work in Progress after totalling Prime Cost and Overhead Cost to obtain the Production Cost.
For Break-Even Analysis, write out the contribution-margin formula first and then substitute the values; also practise sketching the break-even graph with the horizontal axis for quantity and the vertical axis for RM values (revenue and cost).
Recheck your work: make sure the Production Cost transferred to the Trading Account equals the final figure in the Manufacturing Account, and that the unit figures in the break-even analysis are reasonable.

Key formulas to memorise

Direct Material Cost = Opening Stock of Materials + Purchases of Direct Materials - Closing Stock of Materials.
Prime Cost = Direct Material Cost + Direct Labour Cost + Direct Expenses.
Production Cost = Prime Cost + Overhead Cost + Opening Work in Progress - Closing Work in Progress.
Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit.
Break-Even Point (units) = Fixed Cost / Contribution Margin per Unit; Break-Even Point (RM) = BEP units x Selling Price per Unit.
Quantity for target profit = (Fixed Cost + Target Profit) / Contribution Margin per Unit.

Illustration: Manufacturing Account of Maju Shoe Factory (statement format)

Item	RM
Direct Material Cost
Opening stock of direct materials	10,000
Purchases of direct materials	70,000
Less: Closing stock of direct materials	-12,000
Direct Material Cost	68,000
Direct Labour Cost	40,000
Direct Expenses	5,000
Prime Cost	113,000
Overhead Cost	28,000
Production Cost	141,000

Concise table for Question 3. For the full 'T'-form account, refer to the worked-example sets.

Practice Questions

Question 1
Question 1 (Components of Production Cost). Sri Muda Furniture Factory reports the following data for March: opening stock of raw materials RM8,000; purchases of raw materials RM50,000; closing stock of raw materials RM6,000; production workers' wages (direct labour) RM24,000; direct expenses (design royalty) RM3,000; factory overhead RM15,000. Calculate the Direct Material Cost, Direct Labour Cost, Direct Expenses, Prime Cost, Overhead Cost and Production Cost.
Answer
Direct Material Cost = 8,000 + 50,000 - 6,000 = RM52,000
Direct Labour Cost = RM24,000
Direct Expenses = RM3,000
Prime Cost = 52,000 + 24,000 + 3,000 = RM79,000
Overhead Cost = RM15,000
Production Cost = 79,000 + 15,000 = RM94,000
Question 2
Question 2 (Production Cost with Work in Progress). Indah Bakery has the following information: Prime Cost RM60,000; production overhead RM20,000; Opening Work in Progress RM5,000; Closing Work in Progress RM7,000. Briefly explain what Opening and Closing Work in Progress mean, then calculate the Production Cost.
Answer
Opening Work in Progress is the partly finished goods brought forward from the previous period; Closing Work in Progress is the partly finished goods not yet completed at the period end.
Production Cost = Prime Cost + Overhead + Opening WIP - Closing WIP
= 60,000 + 20,000 + 5,000 - 7,000 = RM78,000
Question 3
Question 3 (Manufacturing Account, statement format, no WIP). Maju Shoe Factory: opening stock of direct materials RM10,000; purchases of direct materials RM70,000; closing stock of direct materials RM12,000; direct labour RM40,000; direct expenses RM5,000; overhead RM28,000. Prepare the Manufacturing Account in statement format and state its purpose. (Refer to the worked-example sets for the full 'T'-form account.)
Answer
Purpose: to determine the total Production Cost of finished goods before transfer to the Trading Account.
Direct Material Cost = 10,000 + 70,000 - 12,000 = RM68,000
Prime Cost = 68,000 + 40,000 + 5,000 = RM113,000
Production Cost = 113,000 + 28,000 = RM141,000
(See the illustrative statement-format table below.)
Question 4
Question 4 (Manufacturing Account with WIP and transfer). Harmoni Plastics: Prime Cost RM90,000; overhead RM35,000; Opening Work in Progress RM8,000; Closing Work in Progress RM6,000. Calculate the Production Cost and state the amount transferred to the Trading Account.
Answer
Production Cost = Prime Cost + Overhead + Opening WIP - Closing WIP
= 90,000 + 35,000 + 8,000 - 6,000 = RM127,000
Amount transferred to the Trading Account (as cost of goods produced) = RM127,000.
Question 5
Question 5 (Break-Even Point: Contribution Margin Method). Segar Beverages sells one unit of its drink at RM10. The variable cost per unit is RM6 and the monthly fixed cost is RM40,000. Explain the meaning of contribution margin, then calculate the contribution margin per unit and the Break-Even Point in units and in RM.
Answer
Contribution margin is what remains of sales revenue after deducting variable cost; it covers fixed cost first, and the rest is profit.
Contribution Margin per Unit = 10 - 6 = RM4
BEP (units) = Fixed Cost / Contribution Margin per Unit = 40,000 / 4 = 10,000 units
BEP (RM) = 10,000 x 10 = RM100,000
Question 6
Question 6 (Target Profit: Contribution Margin Method). Cahaya Candles sells candles at RM15 per unit with a variable cost of RM9 per unit and fixed cost of RM30,000. What quantity must be produced and sold to achieve a target profit of RM18,000?
Answer
Contribution Margin per Unit = 15 - 9 = RM6
Quantity = (Fixed Cost + Target Profit) / Contribution Margin per Unit
= (30,000 + 18,000) / 6 = 48,000 / 6 = 8,000 units
Question 7
Question 7 (Analysing a change in selling price). Pintar Stationery initially sells one unit at RM20, with a variable cost of RM12 per unit and fixed cost of RM48,000. Calculate the original BEP. The company then raises the selling price to RM22 per unit (variable and fixed costs unchanged). Calculate the new BEP and analyse the effect of the price increase on the BEP.
Answer
Original: Contribution Margin per Unit = 20 - 12 = RM8; BEP = 48,000 / 8 = 6,000 units
New: Contribution Margin per Unit = 22 - 12 = RM10; BEP = 48,000 / 10 = 4,800 units
Analysis: The price increase raises the contribution margin per unit from RM8 to RM10, thereby lowering the BEP from 6,000 units to 4,800 units. The company now breaks even by selling fewer units.

What is the difference between direct cost and overhead cost?

Direct cost can be traced straight to the product (for example direct materials, direct labour and direct expenses) and makes up the Prime Cost. Overhead cost is the indirect production cost that cannot be traced directly to a single unit, such as factory rent and machinery depreciation.

Why is Opening Work in Progress added but Closing Work in Progress subtracted?

Opening Work in Progress is the cost of partly finished goods from the previous period that are completed in this period, so it is added. Closing Work in Progress is goods not yet finished at the period end, so its cost is subtracted, leaving only the cost of completed goods as Production Cost.

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