Explain the assumptions behind the determination of Economic Order Quantity

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Question 1

Explain the advantages of centralized system of maintaining stores. (4 marks)
Explain the assumptions behind the determination of Economic Order Quantity (EOQ). (4marks)
The following information is given for material Y-20.

Consumption:
Annual 480,000 units
Maximum     1,600 units/day
Minimum        1200 units/day
Normal        1400 units/day
Re-order period  12 – 24 days
Re-order quantity   32,000 units

Required:
Re-order level. (4 marks)
Minimum stock level. (4marks)
Maximum stock level (4 marks)
(Total: 20 marks)

QUESTION 2
The following information relates to item Q002 stocked by Mutaka products Ltd for the month of April 2004:
Receipts Issues
Date Units Units Unit cost (Sh)
April3 2,400   20
4   3,200
6 2,600   18
12   2,700
14 3,000   24
18 2,800   22
20   2,200
22 2,600   21
25   3,800
26 3,100   23
27 2,500   24
28 3,200   27
29   6,900

The closing balance for March 2004 was a batch of 2,900 units received at a unit price of Sh 21.

Required:
Stores perpetual inventory record for item Q002 for April 2004 under LIFO and FIFO systems of stores issues.          (14 marks)
Closing stock valuation under the two systems (6 marks)
(Total: 20 marks)

Question 3

The following balances remained in the books of Kingi Ltd and manufacturing co for the year ended 30th November 2009.

Stock 1st December 2008                                                                  (000 shs)
Raw materials                                                                                     400
Working in progress                                                                           200
Finished goods                                                                                    1400

Purchase of raw materials                                                                   4500
Return outwards raw materials                                                           60
Repairs to factory building                                                                 150
Salaries & wages                                                                                 120
Factory workers                                                                                  800
Salesmen                                                                                             180
Administration staff                                                                              420
Insurance                                                                                             500
Depreciation on plant                                                                          120
Depreciation on buildings                                                                   400
Advertising expenses                                                                          40
Discount allowed                                                                                10
Cleaning expenses of the building                                                      15
Bank charges                                                                                       19
Depreciation delivery van                                                                   30

Stocks on 30th November 2009
Raw materials                                                                                     470
Work in progress                                                                                 290
Finished goods                                                                                    1300

Rent                                                                                                    2000
Direct expenses                                                                                   230
Sales                                                                                                    13500
Sales returns                                                                                        700

Additional information
The company building occupies an area of 10,000m2 of this area the factory occupies 4000m2 warehouse occupies 2500m2 and the rest is occupied by administration office
Prepaid insurance amounted to shs 50,000 at the end of the year. Insurance is apportioned in the ration 2:2:1 to the factory, warehouse and offices respectively.
A provision of shs 50,000 needs to be made for a bonus payable to the factory supervisors

Required
a) Manufacturing cost statement (10marks)
b) Trading profit and loss account for the year ended 30th November 2009 (10marks)

Question 4
Tom ltd has two production departments, A and B, and two service departments, stores and General Services.
The company has budgeted the following costs for the forthcoming period.
Shs
Maintenance                                                    100
Depreciation of plant                                       60
Plant insurance                                                 60
Heat and light                                                    75
Canteen cost                                                    30
Rent                                                                 50
Supervision                                                     120
The following information is also available
A                     B                     Stores              General
Floor Area Square meters               15,000             8,000                    3,500              3,500
Employees                                             50                  25                         15                    10
Plant book value                                 200,000           100,000           50,000             40,000
Machine hours                                     80,000              60,000
Direct material usage                          300,000           400,000

Overheads are absorbed in both production departments on a machine Hour basis.

Required:
a) Prepare an overhead analysis sheet for the period, using suitable bases apportionment                                                                                                                                           (15 marks)
b) Calculate the Overhead absorption rates for each department                                     (5 marks)

QUESTION 5

Timau Ltd produces a detergent which passes through two processes namely mixing and refining to completion.  The following data relate to the refining process for the month of June 2000.
Cost of opening stock: Shs.
Materials 100,000
Labour 25,000
Overheads 60,000

During the month 20,000 units were passed from the mixing to the refining process.  Costs incurred during the month were:

Shs.
Labour                                                 125,000
Overheads                                           108,100
Other materials                                                45,300

At the end of the month 21,000 units had been completed and passed to finished goods while 4,000 were still in process having reached the following stages:

Materials         –           100%
Labour             –             40%
Overheads       –             60%

Required:
Refining Process Account.                                                                                      (15marks)

QUESTION 6
On 4 May 1999, Watamu Construction Company was contracted by Makoha Ltd. to construct a leisure park in Nairobi at a contract price of Sh. 950,000,000.  Work commenced on the contract on 28 July 1999.  Retention money was agreed at 10% of work certified.  At the end of the first year, no profits were declared as the contract was considered to be in its infancy
The following details relate to the contract for the year ended 31 December 2000:
Sh’000
Balances brought forward 1.1.2000

Materials on site 4,500
Accrued wages 1,250
Plant (cost) 150,000
Cost of work done 158,000
Work certified to 31 December 1999 160,000

Transactions during the year.
Materials delivered to site:
Ex-stores 14,600
By suppliers 128,400
Additional plant (cost) 120,000
Subcontractors fees 18,450
Consultancy fee 28,000
Inspection fee 500
Salaries and wages 160,000
Head office expenses 1,200
Material transfers out 15,000
Materials sales (cost Sh 19,800) 22
Plant hire 250
Direct expenses 2,600
Total cash received from contractee 580,000
Work certified during the year 660,000
Cost of work uncertified 42,000

Balances carried forward:

Materials on site 51,000
Wages accrued 2,800

Plants have been purchased for use on this contract.  Watamu Construction Company provides for depreciation on plant at 12 1/2% per annum on cost.

Required:
(i) Contract account for the year to 31 December 2000, clearly showing the profits/ (losses) on contract for the year. (10 marks)
(ii) Valuation of work-in-progress   (5marks)

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