Cost Accounting
Cost Accounting
| Course Name: Cost Accounting | Student’s Name: |
| Course Code: ACCT 301 | Student’s ID Number: |
| Semester: 1st | CRN: 14589 |
| Academic Year: 1445 H | |
For Instructor’s Use only
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 No exceptions.
- All answers must be typed using Times New Roman (size 12, double-spaced) No pictures containing text will be accepted and will be considered plagiarism.
- Submissions without this cover page will NOT be accepted.
Assignment Question(s): (Marks 15)
Q1. Discuss with suitable examples why activity-based costing (ABC) is better than the traditional costing system. Provide a suitable numerical example of ABC in the manufacturing sector and show all the necessary calculations required under the ABC system.
(3 Marks)
Note: Your answer must include suitable numerical examples showing all the calculations of the ABC system. You are required to assume values of numerical examples of your own and they should not be copied from any sources. (Chapter 7)
Answer:
Activity-based costing (ABC) is a system that assigns costs to the specific activities performed in a manufacturing or service delivery process. ABC attempts to trace costs more accurately to products or other cost objects than traditional costing methods.
Traditional cost accounting methods are also used to allocate nonmanufacturing costs for some types of contractual reporting. For example, hospitals prepare cost reports for the government in which they allocate overhead to patient services. Also, defense contractors allocate nonmanufacturing overhead costs to products for cost reimbursement reports.
Comfort Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled:
| Number of | Number of | Number of | ||||||
| Product | Setups | Components | Direct Labor Hours | |||||
| Standard | 12 | 8 | 255 | |||||
| Deluxe | 28 | 12 | 245 | |||||
| Overhead costs | $52,000 | $78,000 | ||||||
Assume a traditional costing system applies the overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the standard model?
Total amount of overhead costs = [($52,000 + $78,000) ÷ (255 + 245)] × 255 = $66,300
Assume ABC costing system is used, Number of setups and number of components are identified as activity-‐‑cost drivers for overhead. what is the total amount of overhead costs assigned to the standard model?
Setups: $52,000 ÷ (12 + 28) = $1,300
Components: $78,000 ÷ (8 + 12) = $3,900
Total amount of overhead costs = ($1,300 × 12) + ($3,900 × 8) = $46,800
Q2. “A non-routine decision is one that is taken in response to a non-repetitive, operational scenario.” Comment on this statement and explain with suitable examples the various types of non-routine operating decisions that a company makes under such a scenario. Support your answer with numerical examples along with qualitative considerations involved in making such decisions. (4 Marks)
Note: Your answer must include suitable numerical examples for various types of non-routine operating decisions. You are required to assume values of numerical examples of your own and they should not be copied from any sources. (Chapter 4)
Answer:
Nonroutine operating decisions are not made on a regular schedule. Examples include:
1-accepts or reject a customer’s special order
2- keep or drop business segments
3- insource or outsource a business activity
4-constrained (scarce) resource allocation issues
Process for Making Nonroutine Operating Decisions
- Identify the type of decision to be made.
- Identify the relevant quantitative analysis technique (s).
- Identify and analyze the qualitative factors.
- Perform quantitative and/or qualitative analyses
Accept special order
Sunbelt Company produces 100,000 Smoothie blenders per month, which is 80% of plant capacity. Variable manufacturing costs are $8 per unit. Fixed manufacturing costs are $400,000, or $4 per unit. The blenders are normally sold directly to retailers at $20 each. Sunbelt has an offer from Kensington Co. (a foreign wholesaler) to purchase an additional 2,000 blenders at $11 per unit. Acceptance of the offer would not affect normal sales of the product, and the additional units can be manufactured without increasing plant capacity. What should management do?
Answer
| Current situation | Special order | Total | |
| Revenue 100,000*20 | 2,000,000 | 22,000 | 2,022,000 |
| (-) Variable costs 100,000*8 | (800,000) | (16,000) | (816,000) |
| = Contribution margin | 1,200,000 | 6,000 | 1,206,000 |
| (-) Fixed costs | (400,000) | Zero | (400,000) |
| = Net income | 800,000 | 6,000 | 806,000 |
Accept special order because profit increase 6,000
Make-or-buy decision
Baron Company incurs the following annual costs in producing 25,000 ignition switches for motor scooters.
Instead of making its own switches, Baron Company might purchase the ignition switches at a price of $8 per unit and he will save 10,000 of fixed costs. “What should management do?”
| Make | Buy | Net income Increase (Decrease) | |
| Direct material | 50,000 | 0 | 50,000 |
| Direct labor | 75,000 | 0 | 75,000 |
| Variable manufacturing overhead | 40,000 | 0 | 40,000 |
| Fixed manufacturing overhead | 60,000 | 50,000 | 10,000 |
| Purchase price(25,000*8) | 0 | 200,000 | (200,000) |
| Total annual costs | 225,000 | 250,000 | (25,000) |
Baron Company will incur $25,000 additional cost if switches are purchased. So, Making is better than buying.
Q3. ADLG Company has two support departments, SS1 and SS2, and two operating departments, OD1 and OD2. The company has decided to use the direct method and allocate variable SS1 dept. costs based on the number of transactions and fixed SS1 dept. costs based on the number of employees. SS2 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 values have been extracted for the allocation: (4 Marks)
| Support Departments | Operating Departments | |||
| SS1 | SS2 | OD1 | OD2 | |
| Total Department variable costs | 16,000 | 19,000 | 105,000 | 68,000 |
| Total department fixed costs | 19,500 | 34,000 | 120,000 | 55,000 |
| Number of transactions | 50 | 55 | 250 | 140 |
| Number of employees | 18 | 24 | 47 | 38 |
| Number of service requests | 37 | 22 | 26 | 32 |
| Number of computers | 20 | 25 | 31 | 37 |
You are required to allocate variable and fixed costs. (Chapter 8)
Answer:
Allocation of variable SS1 :-
Allocation of variable ss1 to OD1 = 16,000 * (250/(250+140)) = 10,256
Allocation of variable ss1 to OD2 = 16,000 * (140/(250+140)) = 5,744
Allocation of fixed SS1 :-
Allocation of fixed ss1 to OD1 = 19,500 * (47/(47+38)) = 10,782
Allocation of fixed ss1 to OD2 = 19,500 * (38/(47+38)) = 8,718
Allocation of variable SS2 :-
Allocation of variable ss2 to OD1 = 19,000 * (26/(26+32)) = 8,517
Allocation of variable ss2 to OD2 = 19,000 * (32/(26+32)) = 10,483
Allocation of fixed SS2 :-
Allocation of fixed ss2 to OD1 = 34,000 * (31/(31+37)) = 15,500
Allocation of fixed ss2 to OD2 = 34,000 * (37/(31+37)) = 18,500
Q4. JKL Company processes a direct material and produces three products: P1, P2, and P3. The joint costs of the three products in 2018 were SAR 120,000. The total number of units for each product and the selling price per unit is given below: (4 Marks)
| Product | Units | Selling Price per unit |
| P1 | 55,000 | SAR 70 |
| P2 | 34,500 | SAR 58 |
| P3 | 10,500 | SAR 44 |
You are required to use the physical volume method and sales value at the split-off method to allocate the joint costs to each product. (Chapter 9)
Answer:
Allocation of joint cost based on physical measures:-
Allocation to P1 = 120,000 * 55,000 / (55,000+34,500+10,500) = 66,000
Allocation to P2 = 120,000 * 34,500 / (55,000+34,500+10,500) = 41,400
Allocation to P3 = 120,000 * 10,500 / (55,000+34,500+10,500) = 12,600
Allocation of joint cost based on sales value at split off point:-
Sales value at split off point (P1) = 55,000 * 70 = 3,850,000
Sales value at split off point (P2) = 34,500 * 58 = 2,001,000
Sales value at split off point (P3) = 10,500 * 44 = 462,000
Total sales value = 6,313,000
Allocation to P1 = 120,000 * 3,850,000 / (3,850,000+2,001,000+462,000) = 73,182
Allocation to P2 = 120,000 * 2,001,000 / (3,850,000+2,001,000+462,000) = 38,036
Allocation to P3 = 120,000 * 462,000 / (3,850,000+2,001,000+462,000) = 8,782
