cost accounting

College of Administration and Finance SciencesAssignment (2)
Deadline: Saturday 04/05/2024 @ 23:59
Course Name: Cost Accounting
Student’s Name:
Course Code: ACCT 301
Student’s ID Number:
Semester: Second
CRN:
Academic Year: 1445 H
For Instructor’s Use only
Instructor’s Name:
Students’ Grade:
/15
Level of Marks: High/Middle/Low
Instructions – PLEASE READ THEM CAREFULLY
• The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
• Assignments submitted through email will not be accepted.
• Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation. This includes filling your information on the cover
page.
• Students must mention question number clearly in their answer.
• Late submission will NOT be accepted.
• Avoid plagiarism, the work should be in your own words, copying from students or
other resources without proper referencing will result in ZERO marks. No exceptions.
• All answers must be typed using Times New Roman (size 12, double-spaced) font.
No pictures containing text will be accepted and will be considered plagiarism.
• Submissions without this cover page will NOT be accepted.
College of Administration and Finance Sciences
Assignment Question(s):
(Marks 15)
Q1. What is the process of identifying activities in an organization and assigning costs under the
Activity Based Costing (ABC) system? Elucidate. You will need to include the right numerical
examples to support your answer.
(2 Marks) (Chapter 7, Week 7)
Answer:
The Process of identifying activities in an organization and assigning costs under the ABC include.
1. Identify Activities
•
Identify all the activities involved in producing a product or providing a service.
•
Classify activities as unit-level, batch-level, product-level, or facility-level.
2. Assign Cost to Activities
•
Analyze cost drivers for each activity.
•
Determine the total cost of each activity based on the cost drivers.
3. Allocate Costs to Cost Objects
•
Allocate costs to products, services, or customers based on their activities’ usage.
•
Use cost drivers to allocate costs accurately.
4. Calculate Product/Service Costs
•
Aggregate the costs allocated to each cost object to determine the total cost of
producing each Product or service (LTC Steve Hanson, 2016).
Numerical Example
Let’s consider a manufacturing company, ABC Manufacturing, which produces two products:
Product X and Product Y. We’ll focus on two activities: Material Handling and Machine
Setup and we will use the above steps to elucidate the ABC method.
Identify Activities
•
Material Handling
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•
Machine Setup
Assign Cost to Activities
•
Material Handling: $10,000 per month
•
Machine Setup: $500 per setup
Allocate Costs to Cost Objects
•
Let’s assume Product X requires 40% of Material Handling activity and 60% of
Machine Setup activity, while Product Y requires 60% of Material Handling activity
and 40% of Machine Setup activity.
•
•
Allocation of Material Handling Cost:
•
Product X: 40% of $10,000 = $4,000
•
Product Y: 60% of $10,000 = $6,000
Allocation of Machine Setup Cost:
•
Product X: 60% of $500/setup = $300/setup (if ten setups are required, total
cost = $3,000)
•
Product Y: 40% of $500/setup = $200/setup (if eight setups are required, total
cost = $1,600)
Calculate Product Costs
•
Total Cost of Producing Product X = Material Handling Cost + Machine Setup Cost =
$4,000 + $3,000 = $7,000
•
Total Cost of Producing Product Y = Material Handling Cost + Machine Setup Cost =
$6,000 + $1,600 = $7,600
Table Representation
Activity
Total Costs ($)
Cost Driver
Product X Costs
Product Y Costs
($)
($)
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Material
10,000/month
Usage
Handling
Machine Setup
4,000
6,000
3,000
1,600
(Percentage)
500/setup
Number of
Setups
This table breaks down the total cost of each activity and how it is allocated to each Product based on
their respective usage of the activities.
Q2. PPLC Company has two support departments, SD1 and SD2, and two operating
departments, OD1 and OD2. The company decided to use the direct method and allocate
variable SD1 dept. costs based on the number of transactions and fixed SD1 dept. costs based on
the number of employees. SD2 dept. variable costs will be allocated based on the number of
service requests, and fixed costs will be allocated based on the number of computers. The
following information is provided:
(4 Marks) (Chapter 8, Week 10)
Support Departments
Operating Departments
SD1
SD2
OD1
OD2
Total Department variable costs
18,000
19,000
51,000
35,000
Total department fixed costs
20,000
24,000
56,000
30,000
Number of transactions
30
40
200
100
Number of employees
14
18
35
30
Number of service requests
28
18
35
25
Number of computers
15
20
24
28
You are required to allocate variable and fixed costs using direct method.
Answer:
The direct method.
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a) Variable Costs
SD1 department
𝑇𝑜𝑡𝑎𝑙 𝑆𝐷1 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡𝑠
Variable Costs for SD1 = 𝑇𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛 𝑛𝑢𝑚𝑏𝑒𝑟 𝑓𝑜𝑟 𝑆𝐷1
=
18,000
30
= $600 per transaction
For OD1
SD1 variable costs allocation = (SD1 variable rate * Transaction number for OD1)
= ($600 * 200)
= $120,000
For OD2
Variable Cost allocation for SD1 = (SD1 variable rate * Transaction number for OD2)
= ($600 * 100)
= $60,000
SD2 department
𝑇𝑜𝑡𝑎𝑙 𝑆𝐷2 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡𝑠
SD2 Variable rate = 𝑡𝑜𝑡𝑎𝑙 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑟𝑒𝑞𝑢𝑒𝑠𝑡 𝑛𝑢𝑚𝑏𝑒𝑟𝑠 𝑓𝑜𝑟 𝑆𝐷2
=
19,000
18
= $1,055.56 per service request
OD1
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Variable cost allocation for SD2 = (SD2 variable rate * Service Request numbers for OD1)
= ($1,055.56 * 35)
= $36,944.44
OD2
Variable cost allocation for SD2 = (SD2 variable rate * Service Request numbers for OD2)
= ($1,055.56 * 25)
= $26,388.89
Allocate the fixed costs.
b) Fixed Costs
SD1 department
𝑇𝑜𝑡𝑎𝑙 𝑆𝐷1 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
SD1 fixed rate = 𝑡𝑜𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒 𝑛𝑢𝑚𝑏𝑒𝑟𝑠 𝑓𝑜𝑟 𝑆𝐷1
=
20,000
14
= $1,428.57 per employee
For OD1
SD1 Fixed Costs Allocation = (SD1 Fixed Rate * OD1 Employee numbers)
= ($1,428.57 * 35)
= $50,000.05
For OD2
Fixed Costs Allocation for SD1 = (SD1 Fixed Rate * OD1 Employee numbers)
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= ($1,428.57 * 30)
= $42,857.10
SD2 department
𝑇𝑜𝑡𝑎𝑙 𝑆𝐷2 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
SD2 fixed rate = 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑝𝑢𝑡𝑒𝑟 𝑛𝑢𝑚𝑏𝑒𝑟𝑠 𝑓𝑜𝑟 𝑆𝐷2
=
24,000
20
= $1,200 per computer
For OD1
SD2 fixed costs allocation = (SD2 Fixed Rate * OD1 Employee numbers)
= ($1,200 *24)
= $28,800
For OD2
SD2 fixed costs allocation = (SD2 Fixed Rate * OD2 Employee numbers)
= ($1,200 *28)
= $33,600
The total allocated costs for every department.
For OD1
Variable Costs = (SD1) 120,000 + (SD2) $36,944.44
= $156,944.44
Fixed Costs = (SD1) $50,000.05 + (SD2) 28,800
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= $ 78,800.05
Total Allocated Costs = ($156,944.44 + $ 78,800.05)
= $235,744.50
For OD2
Variable Costs = (SD1) 60,000 + (SD2) $26,388.89
= $86,388.89
Fixed Costs = (SD1) $42,857.10 + (SD2) 33,600
= $ 76,457.10
Total Allocated Costs = ($86,388.89 + $ 76,457.10)
= $162,845.99
Q3. What are an organization’s “outsourcing decisions” and “constrained resource decisions?”
Provide a suitable numerical example of these decisions and explain how quantitative and
qualitative considerations support a company’s decision-making process.
(2 Marks) (Chapter 4, Week 9)
Note: Your answer must include suitable numerical examples. You are required to assume values
of your own, and they should not be copied from any sources.
Answer:
Outsourcing Decisions
Outsourcing decisions involve determining whether to perform certain activities in-house or to
outsource them to external vendors.
College of Administration and Finance Sciences
Constrained Resource Decisions
Constrained resource decisions refer to situations where a company has limited resources and must
decide how to allocate them effectively (Hill, 2017).
Numerical Example
Consider Widget Works, a manufacturing company faced with two critical decisions: outsourcing the
production of a component and allocating its constrained manufacturing capacity between two
products.
1. Outsourcing Decision
•
Cost of in-house production: $500,000 annually
•
Cost of outsourcing: $400,000 annually
•
Cost Savings: $100,000 ($500,000 – $400,000)
2. Constrained Resource Decision
•
Widget Works has a manufacturing capacity of 10,000 units.
•
Producing Product A requires 5,000 units of capacity.
•
Producing Product B requires 3,000 units of capacity.
Quantitative Considerations
•
Cost Savings: Outsourcing the component production would result in a direct cost saving
of $100,000.
•
Resource Utilization: Widget Works must optimize its manufacturing capacity to
maximize revenue.
•
Production Costs: The Company needs to assess the production costs of each Product to
determine Profitability.
Qualitative Considerations
College of Administration and Finance Sciences
•
Quality Control: In-house production may provide better product quality control than
outsourcing.
•
Lead Time: Outsourcing may lead to longer lead times than in-house production.
•
Supplier Reliability: The Company needs to assess the reliability and reputation of the
outsourcing supplier.
Decision-Making Process
•
Quantitative Analysis: Widget Works compares the cost savings from outsourcing with
the additional costs and benefits of in-house production. Additionally, the company
evaluates the revenue potential of producing Product A versus Product B within the
constrained manufacturing capacity.
•
Qualitative Analysis: The Company considers quality control, lead time, and supplier
reliability factors to make an informed decision.
•
Decision: After considering both quantitative and qualitative factors, WidgetWorks
decides to outsource the production of the component to achieve cost savings. However,
regarding the constrained resource decision, the company prioritizes Product A
production within its manufacturing capacity due to its higher Profitability.
Table Representation
Outsourcing Decision
Decision
Outsourcing
Costs ($)
400,000
Quantitative
Qualitative
Consideration
Consideration
Cost Savings
Quality Control, Lead
Time, Supplier
Reliability
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In-House
500,000
Resource Utilization,
Quality Control, Lead
Production Costs
time
Revenue Potential
Profitability
Constrained Resource Decision
Product
Required Capacity
Consideration
A
5,000 units
High
Highest Profitability
per unit
B
3,000 units
Moderate
Lowest Profitability
Compared to A
Q4. VBN plastic industry makes three plastic toys: T1, T2, and T3. The joint costs of the three
products in 2017 were SAR 120,000. The total number of units for each product and the selling
price per unit is given below:
(3 Marks) (Chapter 9, Week 11)
Product
Units
Selling Price per unit
T1
45,000
SAR 15
T2
26,000
SAR 14
T3
18,000
SAR 10
You are required to allocate the joint costs to each product using the physical volume method and sales
value at the split-off method.
Answer:
a) Physical method
Total produced units = (T1 units + T2 units + T3 units)
College of Administration and Finance Sciences
= (45,000 + 26,000 + 18,000)
= 89,000 units.
𝑇𝑜𝑡𝑎𝑙 𝑗𝑜𝑖𝑛𝑡 𝑐𝑜𝑠𝑡𝑠
Cost per unit of joint costs = ,𝑡𝑜𝑡𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑢𝑛𝑖𝑡𝑠
120,000
= 89,000
= SAR 1.35 per unit
Joint cost allocation for every product
T1
= 45,000 units * 1.35 per units
= SAR 60,674.35
T2
= 26,000 units * 1.35 per unit
= SAR 35,070
T3
= 18,000 units * 1.365 per unit
= SAR 24,256.07
b) Split off method
Split off total sales value = (T1 units * T1 selling price per unit) + (T2 units * T2 selling price Per
unit) + (T3 units * T3 selling price per unit)
= (SAR 45,000 * 15) + (SAR 26,000 * 14) + (SAR18,000 * 10)
= (SAR 675,000 + SAR 364,000 + SAR 180,000)
= SAR 1,219,000
T1
=
𝑇1 𝑢𝑛𝑖𝑡𝑠∗ 𝑇1 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝑡𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑠𝑝𝑙𝑖𝑡 𝑜𝑓𝑓
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(45,000∗15)
= 1,219,000
= 0.05574
T2
=
=
𝑇2 𝑢𝑛𝑖𝑡𝑠∗ 𝑇2 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝑡𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑠𝑝𝑙𝑖𝑡 𝑜𝑓𝑓
(26,000∗14)
1,219,000
= 0.03038
T3
=
𝑇3 𝑢𝑛𝑖𝑡𝑠∗ 𝑇3 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝑡𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑠𝑝𝑙𝑖𝑡 𝑜𝑓𝑓
(18,000∗10)
= 1,219,000
= 0.01476
Joint cost allocation for every product
T1
= 120,000 * 0.005574
= SAR 6,688.80
T2
= 120,000 * 0.03038
= SAR 3,645.60
T3
= 120,000 * 0.01476
= SAR 1,771.20
Physical method
T1 = SAR 60,674.35
T2 = SAR 35,069.58
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T3 = SAR 24,256.07
Split off method
T1 = SAR 6,688.80
T2 = SAR 3645.60
T3 = SAR 1771.20
Q5. MN&M Corporation is preparing a budget for 2018. The company provides you with the
following details which will help you to prepare the budget:
(4 Marks) (Chapter 10, Week 12)
Budgeted selling price per unit
=
SAR 500 per unit
Total fixed costs
=
SAR 150,000
Variable costs
=
SAR 100 per unit
Required:
You are required to prepare a flexible budget for 1,000, 1,100, 1,200 and 1,300 units.
Answer:
Flexible budgets
For 1000 units
Total variable Costs = SAR 100 * 1000
= SAR 100,000
Total Costs = (SAR 100,000 + SAR 150,000)
= SAR 250,000
Total Revenue = 500 * 1000
= SAR 500,000
Profit = Total Revenue – Total Costs
= SAR 500,000 – SAR 250,000
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= SAR 250,000
For 1100 units
Total variable Costs = SAR 100 * 1100
= SAR 110,000
Total Costs = (SAR 110,000 + SAR 150,000)
= SAR 260,000
Total Revenue = 500 * 1100
= SAR 550,000
Profit = Total Revenue – Total Costs
= SAR 550,000 – SAR 260,000
= SAR 290,000
For 1200 units
Total variable Costs = SAR 100 * 1200
= SAR 120,000
Total Costs = (SAR 120,000 + SAR 150,000)
= SAR 270,000
Total Revenue = 500 * 1200
= SAR 600,000
Profit = Total Revenue – Total Costs
= SAR 600,000 – SAR 270,000
= SAR 330,000
For 1300 units
Total variable Costs = SAR 100 * 1300
= SAR 130,000
College of Administration and Finance Sciences
Total Costs = (SAR 130,000 + SAR 150,000)
= SAR 280,000
Total Revenue = 500 * 1300
= SAR 650,000
Profit = Total Revenue – Total Costs
= SAR 650,000 – SAR 280,000
= SAR 370,000
Therefore, the flexible budget table will be as follows.
Unit numbers
Total Variable Total
Fixed Total
Costs Total Revenue Profit (SAR)
Costs (SAR)
Costs (SAR)
(SAR)
(SAR)
1,000
100,000
150,000
250,000
500,000
250,000
1,100
110,000
150,000
260,000
550,000
290,000
1,200
120,000
150,000
270,000
600,000
330,000
1,300
130,000
150,000
280,000
650,000
370,000
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References
Cost Accounting And Financial, (2014) Intermediate, Study Notes, The Institute of Cost Accountants
of India, CMA Bhawan, 12, Sudder Street, Kolkata – 700 016. Cost Concepts and Behavior
Hill, R. (2017) Cost Terms, Concepts, and Classifications. http://www.virtualkollage.com
S. Roychowdhury (2014) Introduction to Cost Accounting, Sloan School of Management,
Massachusetts Institute of Technology, 15.501/516
LTC Steve Hanson, (2016) Cost Concepts for Accounting Analysis, Director of Training U.S. Army
Financial Management School.
Yakup Z. (2018). Activity-Based Costing Analysis in A Firm, Dokuz Eylul University Graduate
School of Natural And Applied Sciences
Warner, M. E., and A. Hefetz. (2012). “Insourcing and outsourcing.” Journal of the American
Planning Association 78:313-327.
College of Administration and Finance Sciences
Assignment (2)
Deadline: Saturday 04/05/2024 @ 23:59
Course Name: Cost Accounting
Student’s Name:
Course Code: ACCT 301
Student’s ID Number:
Semester: Second
CRN:
Academic Year: 1445 H
For Instructor’s Use only
Instructor’s Name:
Students’ Grade:
/15
Level of Marks: High/Middle/Low
Instructions – PLEASE READ THEM CAREFULLY
• The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
• Assignments submitted through email will not be accepted.
• Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation. This includes filling your information on the cover
page.
• Students must mention question number clearly in their answer.
• Late submission will NOT be accepted.
• Avoid plagiarism, the work should be in your own words, copying from students or
other resources without proper referencing will result in ZERO marks. No exceptions.
• All answers must be typed using Times New Roman (size 12, double-spaced) font.
No pictures containing text will be accepted and will be considered plagiarism.
• Submissions without this cover page will NOT be accepted.
College of Administration and Finance Sciences
Assignment Question(s):
(Marks 15)
Q1. What is the process of identifying activities in an organisation and assigning costs under the
Activity Based Costing (ABC) system? Elucidate. You will need to include the right numerical
examples to support your answer.
(2 Marks) (Chapter 7, Week 7)
Answer:
Q2. PPLC Company has two support departments, SD1 and SD2, and two operating
departments, OD1 and OD2. The company decided to use the direct method and allocate
variable SD1 dept. costs based on the number of transactions and fixed SD1 dept. costs based on
the number of employees. SD2 dept. variable costs will be allocated based on the number of
service requests, and fixed costs will be allocated based on the number of computers. The
following information is provided:
(4 Marks) (Chapter 8, Week 10)
Support Departments
Operating Departments
SD1
SD2
OD1
OD2
Total Department variable costs
18,000
19,000
51,000
35,000
Total department fixed costs
20,000
24,000
56,000
30,000
Number of transactions
30
40
200
100
Number of employees
14
18
35
30
Number of service requests
28
18
35
25
Number of computers
15
20
24
28
College of Administration and Finance Sciences
You are required to allocate variable and fixed costs using direct method.
Answer:
Q3. What are an organization’s “outsourcing decisions” and “constrained resource decisions?”
Provide a suitable numerical example of these decisions and explain how quantitative and
qualitative considerations support a company’s decision-making process.
(2 Marks) (Chapter 4, Week 9)
Note: Your answer must include suitable numerical examples. You are required to assume values
of your own, and they should not be copied from any sources.
Answer:
Q4. VBN plastic industry makes three plastic toys: T1, T2, and T3. The joint costs of the three
products in 2017 were SAR 120,000. The total number of units for each product and the selling
price per unit is given below:
(3 Marks) (Chapter 9, Week 11)
Product
Units
Selling Price per unit
T1
45,000
SAR 15
T2
26,000
SAR 14
T3
18,000
SAR 10
You are required to allocate the joint costs to each product using the physical volume method and sales
value at the split-off method.
Answer:
College of Administration and Finance Sciences
Q5. MN&M Corporation is preparing a budget for 2018. The company provides you with the
following details which will help you to prepare the budget:
(4 Marks) (Chapter 10, Week 12)
Budgeted selling price per unit
=
SAR 500 per unit
Total fixed costs
=
SAR 150,000
Variable costs
=
SAR 100 per unit
Required:
You are required to prepare a flexible budget for 1,000, 1,100, 1,200 and 1,300 units.
Answer: