- 20 Marks
Question
a. Nana Nkrumah has been running a plantain chip production business for the past six months; his accounting records are limited to an analysed cash book, cheque book stubs and file of invoices. Both he and his accountant are happy with this for the preparation of the annual accounts for the tax authorities and the bank, but Nana now wants more information for controlling the business. When talking to his accountant about setting up a suitable costing system, Nana was clear about the difference between management and financial accounts. However, he became very confused over different categories of cost and has asked you for some clarification.
You are required to explain the distinction between the following: i. Direct and indirect cost ii. Fixed and variable costs iii. Production and non-production costs iv. Committed and discretionary cost (10 marks) b. Nana Nkrumah pays his workers in the production department on a piece work basis. The workers produce a standard item, and the standard time allowed for the purpose of calculating pay is five minutes per unit. The company also guarantees these workers 75% of a time-based rate of pay, based on the rate of GH2 per per hour for 7.5 hours day and a five-day week. Piece work is paid at the rate of GHC 20 per standard hour.
You are required to compute the following.
The weekly pay for a worker who produces:
i. 444 units per week ii. 400 units per week (10 marks) (Total: 20 marks)
Answer
(a) Distinctions Between Cost Categories:
i. Direct and Indirect Costs: Direct costs are traceable to a specific cost unit/object, e.g., raw materials for plantain chips in Nana’s business. Indirect costs cannot be traced directly, e.g., factory rent allocated via overheads. Distinction aids in product costing for pricing in Ghanaian SMEs.
ii. Fixed and Variable Costs: Fixed costs remain constant regardless of output level, e.g., salary of Nana’s accountant. Variable costs change with output, e.g., plantain purchases. Key for break-even analysis in management accounting.
iii. Production and Non-Production Costs: Production costs relate to manufacturing, e.g., direct labor in chip production (prime cost + overheads). Non-production costs are selling/admin, e.g., marketing expenses. Separated in manufacturing accounts per IAS 2.
iv. Committed and Discretionary Costs: Committed costs are unavoidable in the short term, e.g., lease payments locked by contract. Discretionary costs can be adjusted, e.g., advertising budget. Relevant for budgeting in volatile Ghanaian economy post-DDEP.
(2.5 marks each, total 10 for explanations with examples.)
(b) Weekly Pay Computations:
First, calculate guaranteed pay: 75% of time-based rate. Time-based: GH¢2/hour × 7.5 hours/day × 5 days = GH¢2 × 37.5 = GH¢75/week. Guarantee: 75% × 75 = GH¢56.25.
Piece work rate: GH¢20 per standard hour. Standard time: 5 min/unit = 1/12 hour/unit (60/5=12 units/hour). So, piece rate per unit: 20 / 12 = GH¢1.6667/unit.
Standard hour = units produced / standard units per hour. Standard: 12 units/hour (60/5). For pay: Piece work pay = (units produced / 12) × 20 (since hours equivalent × 20).
Yes, effective piece rate = 20 × (5/60) = 20/12 ≈1.667 per unit.
Pay = max(piece work pay, guarantee).
i. For 444 units: Equivalent standard hours = 444 × (5/60) = 444 × 1/12 = 37 hours. Piece pay = 37 × 20 = GH¢740.
Guarantee, so GH¢740.
ii. For 400 units: Standard hours = 400 / 12 = 33.333 hours. Piece pay = 33.333 × 20 = GH¢666.67.
56.25, so GH¢666.67.
(5 marks each, for calculations and comparison to guarantee.)
- Topic: Production Costs
- Series: APR 2023
- Uploader: Samuel Duah