wie BAG < ww. danlyalstudios. comune bu Coursename: | Cost Accounting! Level: ‘AD, ADB, BS Course Code: : 5410 i Semester: | Spring 2022 | Assignment: { 2 Due Date: 02-10-2022 i Total Assignment: i . 2 LateD ite: . 02- -10- 2022 Bhd Lenka cn, eg eas 2 SAP hui = Pe BEWSAIL Sul 80g Mts pre B gS Lt IN | 03096696159.pa/ ute rgb esr Assignment no. 2 Q. 1 The Alpha Manufacturing Company is purchasing a particular material at the cost of Rs. 300 per unit. Monthly usage is 1,500 units. The ordering cost is Rs.50 per order and the annual carrying cost is 16% Presently the procurement of material is based on Economic Order Quantity modeling. A supplier has offered the company for supply of requisite material at 5% discount if the orders in the lots of 3,000 units are placed. Required: Evaluate this offer if the company should accept this offer or purchase the materials on Economic Order Quantity basis. Ans Monthly usage = 1500 * 300 = 450000 Ordering Cost = 1500 * 50 = 75000 + 16% = 87000 EOQ = JARx2x0C/UCxCC% = ¥1500 units x12 2 Rs.300 /Rs.50x16% =185.90 Q.2 What are the advantages and disadvantages of FIFO and LIFO costing methods of materials issuance to production? Ans First-in-first out (FIFO) Method KAPITI. ty MOU Studion 9 2 He Stee GLuwe GES < www.daniyalstudio9.comys* nef fh FIFO method is based on the assumption that materials which are purchased first are issued first. It uses the price of the first batch of materials purchased for all issues until all units from this batch have been issued. After the first batch if fully issued, the prices of the next batch received becomes the issue price. When this batchds also fully issued) the price of the further next batch issued for pricing and so on. In other words, the materials are issued at the oldest cost price listed in the store’s ledger account and thus, the materials in stock are valued at the price of the latest price. However, an endeavor is made in the method that materials which run the risk of obsolescence are issued first. Suitability This method is most suitable in times of falling prices because the issue price of materials to jobs will be ingang wineries cost of replacement of materials will be low. But in case of rising prices, this method is not suitable because the issue price of materials to production will be low while the cost of replacement of materials will be high. This method is useful for materials which are subject to obsolescence and deterioration In periods of rising prices, the FIFO method produces higher profits and results in higher tax liability because lower cost is charged to production Conversely in periods of falling, prices. The FIFO method produces lower profits and results in lower taxes because they are derived from a higher cost of goods sold. Advantages of FIFO Method The system the following advantages. . It is based on a realistic assumption that materials are issued in the order loss of the receipts. . Materials are issued at actual cost and thus no unrealistic profit or arises from the operation of this method. . This method is easy to understand and simple to operate. . The value of closing stock will reflect current market. . If purchase are few and if the prices are of materials remain stable price. the method will be simple to operate. + This method is useful when prices are falling. AAAS EE ty MOU Studio 9 LS ee Se tent G Luewe GES < www.daniyalstudio9.comys* nef fh . It is a logical method because it taken into consideration the normal procedure of utilizing first those materials which are received first. Disadvantages of FIFO Method This method suffers from the following disadvantages: . It involves complicated calculations and hence increases the possibility of clerical errors. . For pricing one requisition more than one price has often to be taken. . When prices rise the issue price does not reflect the market prices as materials are issued from the earliest consignments. . In case of fluctuations in prices of materials, comparison between one job and the other job becomes difficult because one job started a few minutes later than another of the same nature may be issued at different prices. : During the period of falling prices cost of production tends to be high. This may lead to cancellation of prospective sales because of high quotation. Last-in-first out Method (LIFO Method) This method operates is just reverse order of FIFO method. It is based on the assumption that the last materials purchased (just before the first issue of material) are the first materials issued Thus the price of the last batch of the materials purchased is used first for all issues until all units from this bateh have been issued. after which the price of the previous batch of materials purchased is used It should be noted that physical flow of materials man not conform to LIFO assumption. Suitability ‘This method is suitable in times of rising prices because materials will be issued from the latest consignment at a price which is closely related to the current price levels Valuing material issues at the price of the Latest available consignment will help the management in fixing the competitive selling prices of the products. AAAS EE ty MOU Studio 9 LS ee Se tent G Luewe GES < www.daniyalstudio9.comys* nef fh This method was first introduced in U.S.A., during the second world war to get the advantages of rising prices. In period of rising prices, profit and tax liability under LIFO method would be lower than under FIFO method because cost will be charged at current prices which are at higher level Conversely. In periods of falling prices, closing stock is saluted.at old prices which are at higher level and thus, profit would also be higher resulting in higher tax liability Advantages of LIFO Method: Following are the main advantage of this method + This method is also quick and simple to operate particularly when prices are fairly steady. . Under this method materials are charged to production at the latest prices paid. + Under this method, in times of rising prices, quotation of prices for company product will be safe and profitable. . This method like FIFO. does not result in any unrealistic profit or loss, . This method is easy to operate where purchase are made frequently less frequently. . Due to the effect of inflation in the cost of production, the reduced profit margin results in saving of lax. Disadvantages of LIFO Method: * Under this method, closing stock is valued at the old prices and does not represent the current economic value. + This method is not realistic as it does not conform to the physical flow of materials + Like FIFO method, in this method as well the material cost of similar jobs, may differ because materials were issued from different lots, and thus, at different prices. It makes comparison difficult + This method is cumbersome when prices are subject to frequent fluctuations. . For pricing a single requisition, more than one price has often to be adopted. . When prices fluctuate this method becomes complicated. AAAS EE ty MOU Studio 9 LS ee Se tent G Luewe GES < www.daniyalstudio9.comys* nef fh Q.3 The Millat Tractors Company employs ten workers as a group for production of the parts. When the group’s weekly production exceeds the standard number of pieces per hour, each worker in the group is paid a bonus for the excessive production in addition to wages hourly rates. The amount of bonus is computed by first determining the percentage by which the group’s production exceeds the standard. One half of this percentage is then applied to a wage rate of Rs. 90 to determine an hourly bonus rate. The standard rate of production before a bonus can be earned is 50 pieces per hour for total hour worked. The production record of the group for a week was as under. Days Hours worked Production in units Monday 80 4450 Tuesday 74 4050 Wednesday 80 4510 Thursday 7oy 4370 Friday 72 4180 Required: Calculate the following: Ans 1) The group’s bonus for each day and for the week. Monday 80 Hrs. X Rs. 90 X 30 % = Rs. 2160 Total = Rs. 6610 Tuesday 74 Hrs. X Rs. 90 X 30 % = Rs. 1998 Total = Rs. 6048 Wednesday 80 Hrs. X Rs. 90 X 30 % = Rs. 2160 Total = Rs. 6670 Thursday 76 Hrs. X Rs. 90 X 30 % = Rs. 2052 Total = Rs. 6422 AAAS EE ty MOU Studio 9 LS ee Se tent G Luewe GES < www.daniyalstudio9.comys* nef fh Friday 72 Hrs. X Rs. 90 X 30 % = Rs. 1944 Total = Rs. 6124 2) The week’s earnings of each employee. Total Earning ~ sum of all days = 31874 Q.4 The following data has been extracted from the record of Basharat Production Industries for the year 2014: - a) Budgeted factory overheads RS. 500,000 b) Actual factory overheads Rs. 455,000 ©) Budgeted machine hours 12,500 hours d) Actual machine hours 12,000 hours Required Ans: 1) Work out the following: - a) Predetermined overhead absorption rate per machine hour. 500000/ 12500 = 40 per hour b) Applied overhead cost. 455 000 / 12000 = 37.91 per hour c) Over or under absorbed factory 500000 — 455000 = 45000 2) Give journal entries for the following: - a) Incurrence of factory overheads. Particular Dr. p L erhead 500000 udget 500000 b) Application of overheads to production. AAAs _ ty MOU Studio 9 See Sitter G Luwe GES < www.daniyalstudio9.comys* nef fh Particular Dr. ce roduction 40 Inits 40 c) Disposition of over or under absorbed overheads. articular ler. Werhead (Over or Under) 45000 ash 45000 Q.5 Q.5 The Petiwal production Company operates with two producing departments, P-I, and P-2 and two service department, S-1, and S-2 Actual factory overheads before from the servicing departments are as under: - Departments Actual FOH before proratic Services | utilized _ ae S-2 P-1 - Rs. 200,000 40% 20% P-2 Rs. 238,000 50% 40% sr of | Rs. 72,000 - 40% S-2 Rs. 90,000 10% — Total Rs. 600,000 100% | 100% Ans 1) Determine the total overheads cost of the Production Departments after proration of the overhead cost of Servicing Departments using the Step method. Direct Cost 200000 238000 72000 600000 Allocated FOH. SI 80 000 119000 (72 000) 300 000 $2 40 000 95200 (900 000) Total FOH 320000 452200 2) Prorate the Servicing Departments overhead cost over the Producing Departments using the Algebraic method and compute total overhead cost of each Producing Departments. Direct Cost 200000 238000 72 000 600000 AAAs _ ty MOU Studio 9 See Sitter G Luwe GRAIG <— www.daniyalstudio9.comy net Sup Allocated FOH: | a: “4000095200 (72.000) 150000 S2_ © “30.000 | 59000) Total FOH | S1=72,000 + 20% $2 $2 = 600,000 + 80% $ Ls J STUDIO AOU STUDIOS AA AUR dy MOU Studio 8 LL ee Sven iG