Level: HOTS (KBAT)
HOTS (KBAT) Worked Examples: Cost Accounting
Six graded HOTS worked examples for Chapter 7 Cost Accounting, covering cost classification, the Manufacturing Account with Work-in-Progress and break-even analysis. Candidates must analyse, correct errors and evaluate, not merely record.
One-hour paid trial · Same-day reply · from RM50/hr
Example 1: Correcting Prime Cost Classification
Question
Solution plan
Prime Cost = Direct Material + Direct Labour + Direct Expense. The supervisor's salary is an indirect cost (supervision, not direct production), so it must be removed from direct labour and moved to Overhead. Compute direct material used (opening + purchases - closing), add direct labour and direct expense for the correct Prime Cost, then total all indirect costs as Overhead. Cost of Production = Prime Cost + Overhead.
| Particulars | RM | RM |
|---|---|---|
| Direct Material Cost | ||
| Opening raw material inventory | 8,000 | |
| Add: Purchase of raw material | 42,000 | |
| Raw material available | 50,000 | |
| Less: Closing raw material inventory | 6,000 | |
| Direct Material Cost | 44,000 | |
| Direct Labour Cost | 25,000 | |
| Direct Expense Cost | 3,000 | |
| PRIME COST | 72,000 | |
| Overhead Cost | ||
| Factory supervisor's salary | 12,000 | |
| Factory rent | 9,000 | |
| Depreciation of machinery | 4,000 | |
| Factory rates | 2,000 | |
| Overhead Cost | 27,000 | |
| COST OF PRODUCTION | 99,000 |
Clerk's error: supervisor salary RM12,000 wrongly placed in direct labour; moved to Overhead.
Answer
The correct Prime Cost is RM72,000 (not RM84,000), Overhead Cost RM27,000 and Cost of Production RM99,000. The clerk overstated Prime Cost by RM12,000 because the supervisor's salary is an overhead, not direct labour.
Where marks are usually lost
Example 2: Cost of Production with Work-in-Progress
Question
Solution plan
Compute direct material (opening + purchases - closing) = RM60,000. Prime Cost = direct material + direct labour + direct expense. Total the overheads (rent + depreciation + rates). Manufacturing Cost = Prime Cost + Overhead. Add Opening WIP (work begun last year, finished this year) and deduct Closing WIP (work not yet finished at year end) to arrive at the Cost of Production of finished goods.
| Particulars | RM | RM |
|---|---|---|
| Direct Material Cost | ||
| Opening raw material stock | 5,000 | |
| Add: Purchase of raw material | 58,000 | |
| Raw material available | 63,000 | |
| Less: Closing raw material stock | 3,000 | |
| Direct Material Cost | 60,000 | |
| Direct Labour Cost | 35,000 | |
| Direct Expense Cost | 5,000 | |
| PRIME COST | 100,000 | |
| Overhead Cost | ||
| Factory rent | 11,000 | |
| Depreciation of oven | 6,000 | |
| Factory rates | 3,000 | |
| Overhead Cost | 20,000 | |
| Manufacturing Cost | 120,000 | |
| Add: Opening Work-in-Progress | 8,000 | |
| 128,000 | ||
| Less: Closing Work-in-Progress | 6,000 | |
| COST OF PRODUCTION | 122,000 |
Answer
The Cost of Production of finished goods is RM122,000. Opening WIP (RM8,000) is added because that cost was incurred last year but the goods were completed this year; Closing WIP (RM6,000) is deducted because those goods are unfinished, so their cost is carried to next year.
Where marks are usually lost
Example 3: Manufacturing Account in 'T' Form with Insurance Adjustment
Question
Solution plan
The insurance charged for this year = RM3,000 - RM500 prepaid = RM2,500. Debit the Manufacturing Account with opening raw material, purchases, direct labour, direct expense, overheads (rent, depreciation, adjusted insurance) and Opening WIP. Credit it with closing raw material, returns outwards, Closing WIP and the Cost of Production (the balancing figure transferred to the Trading Account). Both sides must balance.
| Particulars | RM | Particulars | RM |
|---|---|---|---|
| Opening raw material stock | 10,000 | Closing raw material stock | 8,000 |
| Purchase of raw material | 70,000 | Returns outwards | 2,000 |
| Direct labour cost | 40,000 | Closing Work-in-Progress | 7,000 |
| Direct expense | 4,000 | Cost of Production (to Trading A/c) | 135,500 |
| Factory rent | 15,000 | ||
| Depreciation of plant | 6,000 | ||
| Factory insurance (adjusted) | 2,500 | ||
| Opening Work-in-Progress | 5,000 | ||
| 152,500 | 152,500 |
Adjusted insurance = RM3,000 - RM500 prepaid = RM2,500.
Answer
Both sides of the Manufacturing Account total RM152,500. The Cost of Production transferred to the Trading Account is RM135,500. Only RM2,500 of insurance is charged because RM500 is prepaid for 2026.
Where marks are usually lost
Example 4: Break-Even Point: Contribution Margin Method
Question
Solution plan
Contribution Margin per unit = Selling Price per unit - Variable Cost per unit. Break-Even Point (units) = Fixed Cost / Contribution Margin per unit. BEP (value) = BEP units x Selling Price per unit. Profit = (Units sold x Contribution Margin per unit) - Fixed Cost.
| Item | Working | Answer |
|---|---|---|
| Contribution Margin per unit | RM5 - RM3 | 2 |
| Break-Even Point (units) | RM40,000 / RM2 | 20,000 |
| Break-Even Point (value) | 20,000 units x RM5 | 100,000 |
| Profit at 30,000 units | ||
| Total Contribution Margin | 30,000 x RM2 | 60,000 |
| Less: Fixed Cost | 40,000 | |
| Profit | 20,000 |
Answer
The Contribution Margin per unit is RM2. The Break-Even Point is 20,000 units, or RM100,000 in value per month. At sales of 30,000 units the firm earns a profit of RM20,000 per month (10,000 units above BEP x RM2).
Where marks are usually lost
Example 5: Analysing Cost Change and Target Profit
Question
Solution plan
Original BEP = Fixed Cost / (Price - original variable cost) = 48,000 / (20 - 12). The new BEP uses the new contribution margin (20 - 14). For target profit: Quantity = (Fixed Cost + Target Profit) / Contribution Margin per unit. To keep BEP at 6,000 units: required contribution margin = Fixed Cost / 6,000, so new price = new variable cost + required contribution margin.
| Item | Working | Answer |
|---|---|---|
| (a) Original BEP | ||
| Original contribution margin/unit | RM20 - RM12 | 8 |
| Original BEP (units) | RM48,000 / RM8 | 6,000 |
| (b) New BEP | ||
| New contribution margin/unit | RM20 - RM14 | 6 |
| New BEP (units) | RM48,000 / RM6 | 8,000 |
| (c) Quantity for RM24,000 profit | ||
| (Fixed Cost + Target Profit) / new CM | (48,000 + 24,000) / 6 | 12,000 |
| (d) Price to keep BEP at 6,000 units | ||
| Required CM = RM48,000 / 6,000 | = RM8 | 8 |
| New selling price = RM14 + RM8 | 22 |
Answer
(a) Original BEP 6,000 units. (b) New BEP 8,000 units. The RM2 rise in variable cost raises BEP by 2,000 units, so the firm must sell more before it makes a profit. (c) For RM24,000 profit, 12,000 units must be sold. (d) Raising the selling price to RM22 restores the contribution margin to RM8 and keeps BEP at 6,000 units despite the higher variable cost.
Where marks are usually lost
Example 6: Graph Method and Target Profit
Question
Solution plan
Total Revenue = Price x Quantity. Total Cost = Fixed Cost + (Variable Cost per unit x Quantity). The Total Revenue line starts at the origin (0,0); the Total Cost line starts at fixed cost (RM24,000) on the vertical axis. The intersection of the two lines is the BEP. For target profit: Quantity = (Fixed Cost + Target Profit) / Contribution Margin per unit, then compare with maximum capacity.
| Quantity (units) | Total Revenue (RM) | Fixed Cost (RM) | Variable Cost (RM) | Total Cost (RM) | Profit/(Loss) (RM) |
|---|---|---|---|---|---|
| 0 | 0 | 24,000 | 0 | 24,000 | -24,000 |
| 3,000 | 30,000 | 24,000 | 18,000 | 42,000 | -12,000 |
| 6,000 | 60,000 | 24,000 | 36,000 | 60,000 | 0 |
| 9,000 | 90,000 | 24,000 | 54,000 | 78,000 | 12,000 |
The Total Revenue and Total Cost lines intersect at 6,000 units (RM60,000) = BEP.
| Item | Working | Answer |
|---|---|---|
| Contribution Margin per unit | RM10 - RM6 | 4 |
| Targeted quantity | (24,000 + 16,000) / 4 | 10,000 |
| Maximum capacity | 10,000 |
Answer
(b) From the graph, the Total Revenue and Total Cost lines intersect at 6,000 units (RM60,000), which is the Break-Even Point. Below it the firm makes a loss; above it, a profit. (c) For RM16,000 profit, the firm must produce 10,000 units. Since this equals the maximum capacity of 10,000 units, the firm can just achieve it, but only at full capacity: any drop in output means the target will be missed.
Where marks are usually lost
Need help with Cost Accounting?
One-hour paid trial · Same-day reply · from RM50/hr
Book a Trial Class