College of Administration and Finance Sciences

Assignment (1)
Deadline: Saturday 08/10/2022 @ 23:59

Course Name: Cost Accounting Student’s Name: Mohammed Alotaibi

Course Code: ACCT 301 Student’s ID Number: S200080971
Semester: 1st CRN: 14647
Academic Year: 1444 H

For Instructor’s Use only

Instructor’s Name: Dr. Shahid Husain
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. How does risk impact decision-making? List the types of risk that impact business
decision-making and provide suitable examples for each type of risk in the context of an
organization.

(3 Marks)

Note: Your answer must include suitable examples for each type of risk. (Week 2, Chapter
1)

Answer Q – 1:

Risk is an essential component of business decisions-making. Risk increases because it is not

possible to predict future outcomes.

Risks always have a negative influence on decision-making process. Some decision makers have risk
management skills and some are not, which will guide them into the decision that associated with
any business risk.

 Economic & Financial Risk: The fear of financial loss when choosing a project to work on,
may change the decision to choose another project with less profit.
 People, Legal & Health Risk: The risks associated with internal bio hazard environment,
working conditions, employees’ injuries. As the company might face legal suits because it’s
responsible for the safety of its employees.
 Political and Social Risk: The risks of working in politically unstable country or a country
with corrupt political system, that might lead to requiring bribes, or confiscation of the firm’s
assets.
 Reputation Risk: The risk of losing good public image when working on a project that
might have an ethical “dilemma”.
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 Weather Risk: The risks associated with weather conditions. For example, for agriculture
firm to choose a place to work in, it must think about that weather risks of dry or floods in
order to prevent a crop loss.
 Criminal and Terrorist Risk: The risks that may occur when working in countries with low
security or law enforcement, that might lead to criminal acts against the firm or its
employees.
 Informational & Operational Risk: The type of risks associated with data breach or cyber-
attacks. Decision makers will have either high cost of operations to protect the data, or high
risks of information loss when lowering the operation.
 Environment & Man Made Risk: The risks that comes from working in industries that
might pollute the environment or compromise the sustainability of earth resources.

References (Q – 1):
Eldenburg, L. G., & Wolcott, S. K. (2011). Cost management: Measuring, monitoring, and motivating performance (2nd ed.).

https://www.masterclass.com/articles/operational-risk - https://www.hse.gov.uk/managing/legal.htm
https://www.investopedia.com/terms/b/businessrisk.asp -
https://www.pmi.org/learning/library/risk-taking-decision-making-process-1971

Q2. Suppose that you are working in a company as a cost manager that is making a single
product. Determine the following values of your own for this product: (3
Marks)

 Selling price per unit

 Variable cost per unit
 Fixed cost
 Target profit for next year

After determining the values for the above, find out:

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a) Break-even point in units.

b) Break-even point in sales value.
c) Units needed to reach target pretax profit (as decided by you in your example).
d) Sales value required to reach target pretax profit (as decided by you in your example).

Note: You are required to assume values of your own and they should not be copied from any
sources. (Week 4, Chapter
3)

Answer Q – 2:

 Selling price per unit = $400

 Variable cost per unit = $160
 Fixed cost = $720,000
 Target profit for next year = $480,000

A) Break Even point in Units = 3,000 units

(F + 0) / (P – V) = ($720,000) / ($400/unit – $160/unit) = ($720,000) / ($240/unit) = 3000

B) Break Even point in $ Sales = $1,200,000

(F + 0) / (CMR) = (F) / ((P – V) / (P)) = ($720,000) / (($400 - $160) / ($400))

= ($720,000) / (60%) = $1,200,000

C) Units needed to reach target pretax profit = 5,000 units

(F + profit) / (P – V) = ($720,000 + $480,000) / ($240/unit) = 5,000

D) Sales value required to reach target pretax profit = $2,000,000

(F + profit) / (CMR) = ($720,000 + $480,000) / ($240 / $400) = ($1,200,000) / (60%) = $2,000,000

 College of Administration and Finance Sciences

CVP and Pre-tax Profit Graph

In 1000’s $
TR

2,000
Profit = $480,000
TC

1,200

720

1000 2000 3000 4000 5000 6000 Units

References (Q – 2):
Eldenburg, L. G., & Wolcott, S. K. (2011). Cost management: Measuring, monitoring, and motivating performance (2nd ed.).

https://www.datarails.com/cost-volume-profit-analysis/

Q3. Critically analyze the differences between the “Account Analysis Method” and the “Two-
Point Method” of estimating a cost function. Provide suitable examples for each method by
 College of Administration and Finance Sciences

assuming the values of your own. (3 Marks)

(Week 3, Chapter 2)

Answer Q – 3:

 Account analysis method:

Account analysis method estimates the cost function by classifying multiple cost accounts as fixed,
variable, or mixed, by reviewing “Past” costs in the general ledger to determine each cost’s behavior.

In order to estimate a cost function using account analysis, we need to separate fixed costs and
variable costs, find the total the fixed costs and total variable costs, then calculate the variable cost
per driver, and finally the cost function.

Next is an example about this method, and how it helps to estimate the cost function.

“ABC” manufacturing firm have sold 200,000 units and recorded $1,000,000 as sales revenue. The
table below shows the expenditures for “ABC” manufacturing for the last year.

Expense Amount Variable cost Fixed cost

Direct material $1,000,000 $1,000,000 -
Property Tax $40,000 - $40,000
Direct labor $600,000 $600,000 -
Insurance $30,000 - $30,000
Rent $50,000 - $50,000
Sales commissions $400,000 $400,000 -
Internet and Phone $20,000 - $20,000
Electricity $60,000 - $60,000
Supervision salary $200,000 - $200,000
Depreciation $170,000 - $170,000

Total TC: $2,570,000 VC: $2,000,000 FC: $570,000

After determining all costs, now we calculate the cost function:

Cost function on UNITS: Cost function on Dollars $:

 College of Administration and Finance Sciences

TC = FC + (VC / unit) x Qty TC = FC + (VC / sales $) x sales $

TC = $570,000 + ($10 / unit) x Qty TC = $570,000 + ($0.20) x sales $

 Two-point method:

This method is based on “past” observations on Engineered estimate or Account analysis.

It’s a way to separate mixed and variable costs when giving limited information. Even though this
method is easier, it does have some drawbacks, like estimating only mixed cost functions, not
accurate, and could misrepresent costs.

Next is an example of two-point method, and how it can help us finding fixed and variable costs.

“In June “XYZ” firm incurred total costs of $116,000 and produced 12,400 units. In October it
incurred total cost of $80,000 and produced 6,400 units”. So, now we have to identify fixed and
variable costs, with this information in the example.

V = The Slope (rise / run) = ($116,000 - $80,000) / (12,400 units – 6,400 units)

V = ($36,000) / (6,000 units) = $6/unit

V = $6/unit

Then, using TC = F + V x Q, and “Any” of the data points to determine F.

$116,000 = F + ($6/unit) x 12,400  $116,000 = F + $74,400

F = $116,000 – $74,400

F = $41,600

Or using the other point because it will also render the same result:

$80,000 = F + ($6/unit) x 6,400  $80,000 = F + 38,400  F = $80,000 - $38,400

F = $41,600

- Fixed costs = $41,600 - Variable costs = $6/unit

 College of Administration and Finance Sciences

References (Q – 3):
Eldenburg, L. G., & Wolcott, S. K. (2011). Cost management: Measuring, monitoring, and motivating performance (2nd ed.).

https://simplestudies.com/cost-estimation-methods-and-an-account-analysis-example.html

Q4. Referring to the concept of job costing in the manufacturing sector, identify how you will
record the following journal entries: (3
Marks)

a) When raw materials are received.

b) When raw materials are sent to the factory floor.
c) When labor costs are incurred.
d) When a job is completed.
e) When a job is shipped to a customer.

Note: You must assume significant values for each transaction of your own and prepare the
journal entries for each case. (Week 5,
Chapter 5)
Answer Q – 3:

a) When raw materials are received.

The firm can record the journal entry when receiving “purchasing” raw materials by debiting raw
materials account and crediting accounts payable.

- The materials warehouse received a shipment of raw materials that cost $10,000.

Account Debit Credit

Raw materials inventory $14,000
Accounts payable $14,000
 College of Administration and Finance Sciences

b) When raw materials are sent to the factory floor.

the firm can record the journal entry when it sends raw materials for production by debiting work in
process inventory and manufacturing overhead accounts and crediting raw materials account.

- Materials are sent to the production area. The cost of the direct materials is $4,000 and the
cost of the indirect materials is $1,000.

Account Debit Credit

Work in process inventory $4,000
Overhead cost control $1,000
Raw materials inventory $5,000

c) When labor costs are incurred.

The firm can record the labor cost journal entry by debiting the labor cost account and crediting
wages payable account.

- The firm has incurred total wages of $4,000.

Account Debit Credit

Labor cost $4,000
Wages payable $4,000

Also we need to know when wages are incurred, there are Direct and Indirect labor costs. In the
example we’ll see the two types.

- Total wages $4,000 are accrued; 90% of these costs are direct labor and 10% are indirect
labor.

Account Debit Credit

Work in process inventory $3,600
Overhead cost control $400
Wages Payable $4,000
 College of Administration and Finance Sciences

d) When a job is completed.

The firm can record the job completion journal entry by debiting the Finished goods inventory
account and crediting Work in process inventory account.

- Job number 772, with a total cost of $3,500 is completed.

Account Debit Credit

Finished goods inventory $3,500
Work in process inventory $3,500

e) When a job is shipped to a customer.

The firm can record the job completion journal entry by debiting the Accounts receivable/cash and
Cost of goods sold accounts, and crediting Sales Finished goods inventory accounts.

- Job number 772 is shipped to the customer, who is billed for $5,000

Account Debit Credit

Accounts receivable $5,000
Cost of goods sold $3,500
Sales $5,000
Finished goods inventory $3,500

References (Q – 4):
Eldenburg, L. G., & Wolcott, S. K. (2011). Cost management: Measuring, monitoring, and motivating performance (2nd ed.).

https://accountinginside.com/labor-cost-journal-entry/ - https://accountinginside.com/raw-material-journal-entry/

https://www.accountingtools.com/articles/journal-entries-for-inventory-transactions
 College of Administration and Finance Sciences

Q5. Alpa Ltd. uses a process costing system for its sole processing department. There were
24,000 units in beginning WIP inventory for March and 216,000 units were started in March.
The beginning WIP units were 60% complete and the 19,500 units in ending WIP were 40%
complete. All materials are added at the start of processing. (3
Mark)

Required:

a) Compute the no. of units started & completed.

b) Compute the EUP for DM and CC using FIFO and WA methods. (Week 5, Chapter
6)

Answer Q – 5:

a) Compute the no. of units started & completed.

WIP inventory - Units

24,000 BI units 24,000
216,000 220,500 S&C units 196,500
Completed units 220,500
19,500

The Number of units started and completed is 196,500 units

b) Compute the EUP for DM and CC using FIFO and WA methods.

Given, S&C = 196,500 BI = 60% EI = 40%

Units summary Physical units EUP for DM EUP for CC

Beginning WIP 24,000 24.000 100% 14,400 60%
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This period’s work

Complete beg WIP 24,000 - 0% 9,600 40%
Start & Complete 196,500 196,500 100% 196,500 100%
Ending WIP 19,500 19,500 100% 7,800 40%
FIFO equivalent units 240,000 216,000 213,900
WA equivalent units (with beg WIP) 240,000 228,300

References (Q – 5):
Eldenburg, L. G., & Wolcott, S. K. (2011). Cost management: Measuring, monitoring, and motivating performance (2nd ed.).

https://www.netsuite.com/portal/resource/articles/accounting/process-costing.shtml - https://xplaind.com/287240/process-costing-fifo

https://www.accountingtools.com/articles/process-costing-process-cost-accounting