GROUP

2 ‫ﻟﻘﺧﻌﺢ‬

ASSIGNMENT 1

PRINCIPLES OF MANGERIAL ACCOUNTING

ACCT 204

MS. GHIDA K. ALHOOSHANI

STUDENT NAME ID
Amjad Alsaqrah 2190005435
Roua Alsayid 2200002604
Latifa Alakkas 2200004315
Misk Almozayn 2200005181
Shouq Aldobisi 2200004672

1
 GROUP 2

Q1/ Identify two reasons why an actual based costing system may be approach for all Décor?

-The ABC approach enables more accurate product costing since costs are divided down into
deeper and more refined categories. This results in greater product costing accuracy. The
overhead cost attributed to a product is divided down into smaller cost pools under the ABC
approach, making it easier to assign overhead costs more directly based on the cost drivers
utilized to generate each product. Currently, overhead expenses are allocated using the
traditional approach, which allocates overhead costs depending on the cost of print and the
estimated amount of units sold, resulting in a high allocation to unframed prints and a low
allocation to framed prints.

-The ABC approach allows for better control of overhead costs: Because the ABC approach
allows businesses to track overhead costs directly to activities, it assists businesses in
identifying expenditures that are classified as indirect but should be classified as direct. As a
result, there is a better understanding of expenses and, as a result, better control.


Q2/ Compute the activity-based overhead rates for each of the four activities.

Activity based overhead rate

Activity cost pools Estimated overhead Expected use of cost driver (Estimated
overhead/expected use of
cost driver)
Picking prints $30,600 102,000 prints 0.3 per print
Inventory selection and $91,700 131,000 components 0.7 per component
management
Website $25,800 100,000 print capacity 0.258 per print
Optimization (unframed)
Website $103,200 25,000 print capacity 4.128 per print
Optimization
(Framed)
Framing and matting cost $123,900 59,000 component at 2.1 per component
capacity

Therefore, the activity based overhead rates are:

1. Picking prints is $0.30 per print.

2. Inventory selection and management is $0.70 per component.

3. Website optimization (unframed print) is $0.258 per print. capacity, and website optimization
(framed print) is $4.128 per print capacity.

4. Framing and matting is $2.10 per component capacity.

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 GROUP 2

Q3/ Discuss the implications of using operating capacity as the cost driver rather than the
expected units sold when allocating fixed overhead costs

Using operating capacity as the base can keep the fixed overhead costs consistent.If fixed
overhead costs are allocated using the expected units sold, which change can from period to
period, which leads to the cost per unit changing from period to period. Therefor, it’s better to
use a base that doesn’t change so often, such as operating capacity, in order to keep the fixed
cost per unit stable over time.

Management can manage costs based on a standard, when using operating capacity as the cost
driver to allocate fixed overhead costs. An activity cost at a standard is what is necessary for
measurement, resource allocation, and evaluation. By allocating fixed overhead costs using
operating capacity as the basis, management can see how much, more or less, each item costs
at capacity. Although this is somewhat unpredictable, it does provide a benchmark for
comparability and improvement. Thus, the use of operating capacity for allocating fixed
overhead costs can result in better decision.

Q4a/ Allocate the overhead to the three product categories (unframed prints, steel-framed
prints, and wood-framed prints with matting), assuming that the estimate of the expected units
sold is correct and the actual amount of overhead incurred equaled the estimated amount of
375200 $

In order to allocate the overhead to the products, first we need to compute the activity rate for
each activity.

Computation of activity rates

Cost pool Overhead cost Total activity Activity rates

Picking prints 30,600$ 102,000$ 0.30 per print
Inventory selection and 91,700$ 131,000$ 0.70 per component
management
Website optimisation 103,200$ 25,000$ 4.128 per print at
(framed) capacity
Website optimisation 25,800$ 100,000$ 0.258 per print
(unframed)
Framing and matting 123,900$ 59000$ 2.10 per component
at capacity

Allocation of overhead

Unframed print Steel Framed print Wood Framed print

Product Activity Unit Cost Unit Cost Unit Cost
rates sold assigned sold assigned sold assigned


Picking prints 0.30 per 0.30*7000=
0.30 * 80000= 0.30*15000=
print 80000 15000 7000 2,100$
24,000$ 4,500$

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 GROUP 2

Inventory 0.70 per

0.7*80000= 0.7*2*15000= 0.7*3*7000
selection and component 80000 15000 7000
management 56,000$ 21,000$ 14,700$
Website 4.128per
4.128*15000= 4.128*7000=
optimisation print at 15000 7000
(framed) capacity 61,920$ 28,896$
Website 0.258 per
0.258*80000=
optimisation print 80000
(unframed) 20,640$
Framing and 2.10 per
2.10*2*15000= 2.10*3*7000=
matting component 15000 7000
at capacity 63,000$ 44,100$
Total 100,640$ 150,420$ 89,796$

4Qb/ Calculate the total amount of overhead allocated. Explain why the total overhead of
375200 $ Was not allocated, even though the estimate of sales was correct. What are the
implications of this for management?

Unframed prints is 100640$

Steel-framed prints is 150420$

Wood-framed prints is 89796$

Total overhead allocated = 100640$ + 150420$+89796$= 340856$

Using the traditional costing method gives us wrong result because it can not calculate the cost
of the IT department correctly. So, we can not identify the accurate profit that caused over-
costing, and leads to losing our market share. However, using the ABC method we can find the
cost of IT department and we get the accurate profit.