Description
All the information that you will need are in the files attached
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The course text book name is:
- Eldenburg, L. G., & Wolcott, S. K. (2011). Cost management: Measuring, monitoring, and motivating performance (2nd ed.). Hoboken, NJ: John Wiley & Sons, Inc. ISBN-13: 978-0470-76942-3.
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Explanation & Answer
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College of Administrative and Financial Sciences
Assignment 2
Deadline: 20 /03/2021 @ 23:59 (End of week 9)
Course Name: Cost accounting
Student’s Name:
Course Code: ACCT 301
Student’s ID Number:
Semester: 2
CRN:
Academic Year: 1441/1442 H
For Instructor’s Use only
Instructor’s Name:
Students’ Grade: Marks Obtained / Out of
Level of Marks: High/Middle/Low
Instructions – PLEASE
•
The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
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Assignments submitted through email will not be accepted.
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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.
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Students must mention question number clearly in their answer.
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Late submission will NOT be accepted.
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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.
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All answered must be typed using Times New Roman (size 12, double-spaced) font. No
pictures containing text will be accepted and will be considered plagiarism).
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Submissions without this cover page will NOT be accepted.
Page 1 of 6
Q1 What process is used to assign costs in an ABC system? Provide numerical example.
(2.5 Marks)
The process used in ABC system can be categorized into 5 stages:
Stage 1: Identification of activities
The first and foremost step is to identify various activities taking place in the organization
and classify it into (a) Primary activities and (b) Secondary (or) Support activities. Primary
activities are activities that are directly involved in the production of the products. Example
– Direct material and direct labor
Secondary (or) Support activities are activities that indirectly support the production
activity. Example – accounting, payroll etc.,
Stage 2: Assigning cost to cost pools
Identify and trace the cost of various activities identified above and pool the costs together
to create activity cost pools.
Stage 3: Apportioning the costs of support activities
Identify a suitable support base from the primary activities and spread the cost of support
activity over the identified base.
Stage 4: Determination of activity cost drivers
The cost driver for each activity is identified based on the factor that drives consumption of
each activity.
Step 5: Finding the activity cost driver rate
Activity cost driver rate can be found by dividing the Total activity cost pool by the
respective identified Cost drivers. The cost is then assigned to various cost objects based on
the resources consumed by each activity.
Numerical example:
Page 2 of 6
Step 1: Let’s say that in an organization we have identified 3 primary activities namely –
purchase of materials (say department 1), machinery operation and mainenance (say
department 2) and testing of products (say department 3) and 1 support activity (say
department 4).
being activities of payroll department.
Step 2: The overheads attributable to department 1, 2, 3, and 4 are: $90,000, $50,000,
$40,000 and $25,000.
Step 3: The cost of department 4 shall be apportioned to the departments 1, 2, 3 based on
the number of employees in each department. Hence the allocated cost will be $10,000,
$10,000 and $5,000 to department 1, 2, and 3 respectively.
The total activity cost pool of Department 1, 2 and 3 after apportionment will be $100,000,
$60,000 and $45,000.
Step 4: The cost drivers are identified as followsDepartment 1 – Number of purchase orders = 10,000 orders
Department 2 – Number of machine hours = 3,000 hours
Department 3 – Number of units tested = 22,500 units
Step 5: Activity rates will be calculated as follows:Department 1 - $100,000 ÷ 10,000 orders = $10 per order
Department 2 - $60,000 ÷ 3,000 hours = $20 per machine hour
Department 3 - $45,000 ÷ 22,500 = $2 per unit tested
Say that the entity receives a Job to make 50 units. It needs 20 purchase orders to be placed
and 40 hours to operate and maintain the machinery. The units are finally tested before final
delivery. The total overhead cost will be calculated as follows:
Purchase order costs = 20 orders x $10 per order = $200
Page 3 of 6
Machinery operation & maintenance = 40 hours x $20 =$800
Testing cost = 50 units x $2 = $100
Total overhead cost for the job = $200 + $800 + $100 = $1,100
Overhead cost per unit = $1,100 ÷ 50 units = $22 per unit.
Q2 How is relevant quantitative and qualitative information used in special order
decisions? Explain and analyze using numerical example.
(2.5 Marks)
Both qualitative and quantitative factors of information are highly relevant in a special order
decisions. Quantitative information will enable the entity to analyze the entity’s ability to
fulfill the order. The following quantitative information is analyzed before accepting the
order:
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The relevant costs incurred in fulfilling the order
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Additional or specific fixed costs if any to be incurred
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The profit that the entity will gain from the order
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Whether the entity has excess capacity to fulfill the order. If there is no excess
capacity, evaluate the opportunity cost of sacrificing any current orders.
The following qualitative factors will be used in analyzing the acceptance of the special
order:
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Whether the labor force has the required technical capacity to work on the order.
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Evaluate whether acceptance of the order will affect relationships with present
customers. Example: If the entity is selling the products in market at $5 per unit and
Page 4 of 6
the special order price is $4, the existing customers might demand a lesser price in
the future.
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Whether the entity can satisfy and retain the quality standards ...
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