College of Administration and Finance Sciences

Assignment (2)
Deadline: Saturday 18/02/2022 @ 23:59

Course Name: Cost Accounting Student’s Name:

Course Code: ACCT 301 Student’s ID Number:
Semester: 2nd CRN:
Academic Year: 1444 H

For Instructor’s Use only

Instructor’s Name:
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.
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Assignment Question(s): (Marks 15)

Q1. Differentiate with suitable examples the traditional costing systems and activity-based
costing. Explain how ABC is used in manufacturing by providing a numerical example.

(3 Marks)

Note: Your answer must include suitable numerical examples. You are required to assume values
of your own and they should not be copied from any sources. (Week 7, Chapter
7)

Answer:

Traditional costing systems allocate overhead costs to products based on a single cost driver, such as

direct labor hours or machine hours. This approach assumes that all products consume overhead

costs in the same way, regardless of their complexity or diversity. For example, a company that

produces two products may allocate overhead costs based on the number of direct labor hours

worked for each product, without considering the actual activities that generate those costs.

Activity-based costing (ABC) allocates overhead costs to products based on the actual activities that

generate those costs. It identifies the activities that consume resources and assigns costs to products

based on their actual consumption of those activities. For example, a company that produces two

products may use ABC to allocate overhead costs based on the number of setups, inspections, and

orders processed for each product, which may differ between the two products (Mishra & Vaysman,

2001).

To illustrate how ABC is used in manufacturing, consider the following example:

ABC Manufacturing produces two products, Product A and Product B. The following information is

available:
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Activity Total Cost Cost Driver Product A Product B

Setup $50,000 Number of setups 100 50

Inspection $30,000 Number of inspections 200 100

Order $20,000 Number of orders 10 20

Using traditional costing, the overhead costs would be allocated based on a single cost driver, such as

direct labor hours or machine hours. However, using ABC, the overhead costs would be allocated

based on the actual activities that generate those costs. To calculate the overhead cost per unit for

each product, we can use the following formula:

Total cost of activity

Overhead cost per unit = x product cost driver
Total cost driver

For Product A, the overhead cost per unit would be:

Setup cost per unit = $50,000 / 150 setups * 100 setups = $33.33 Inspection cost per unit = $30,000 /

300 inspections * 200 inspections = $20.00 Order cost per unit = $20,000 / 30 orders * 10 orders =

$6.67

Total overhead cost per unit for Product A = $33.33 + $20.00 + $6.67 = $60.00

For Product B, the overhead cost per unit would be:

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Setup cost per unit = $50,000 / 150 setups * 50 setups = $16.67 Inspection cost per unit = $30,000 /

300 inspections * 100 inspections = $10.00 Order cost per unit = $20,000 / 30 orders * 20 orders =

$13.33

Total overhead cost per unit for Product B = $16.67 + $10.00 + $13.33 = $40.00

Therefore, using ABC, the overhead costs are allocated to each product based on their actual

consumption of the activities that generate those costs. This approach provides more accurate cost

information and allows companies to make better decisions about pricing, product mix, and process

improvement.

Q2. RCR has two support departments, X1 and X2, and two operating departments, Z1 and
Z2. RCR has decided to use the direct method and allocate variable X1 dept. costs based on the
number of transactions and fixed X1 dept. costs based on the number of employees. X2 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 information is provided:
(Week 9, Chapter 8) (4
Marks)

  Support Departments Operating Departments

  X1 X2 Z1 Z2
Total Department variable costs 12,500 15,000 95,000 52,500
Total department fixed costs 14,500 27,500 105,000 45,000
Number of transactions 38 45 175 112
Number of employees 14 18 38 30
Number of service requests 30 18 38 25
Number of computers 15 20 25 30
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You are required to allocate the variable and fixed costs.

Answer:
Using the direct method, we can allocate the variable and fixed costs of the support departments to

the operating departments as follows:

Step 1

Allocate the variable costs of X1 department based on the number of transactions

Variable cost allocation rate for X1 department = Total variable costs of X1 department / Number of

transactions in X1 department = $12,500 / 38 = $328.95 per transaction

Using this rate, the variable costs of X1 department allocated to Z1 and Z2 departments are:

Z1 department variable costs = 175 transactions in Z1 department * $328.95 per transaction =

$57,609.38 Z2 department variable costs = 112 transactions in Z2 department * $328.95 per

transaction = $36,847.74

Step 2:

Allocate the fixed costs of X1 department based on the number of employees

Fixed cost allocation rate for X1 department = Total fixed costs of X1 department / Number of

employees in X1 department = $14,500 / 14 = $1,035.71 per employee

Using this rate, the fixed costs of X1 department allocated to Z1 and Z2 departments are:

Z1 department fixed costs = 38 employees in Z1 department * $1,035.71 per employee = $39,301.98

Z2 department fixed costs = 30 employees in Z2 department * $1,035.71 per employee = $31,071.30

Step 3:
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Allocate the variable costs of X2 department based on the number of service requests

Variable cost allocation rate for X2 department = Total variable costs of X2 department / Number of

service requests in X2 department = $15,000 / 18 = $833.33 per service request

Using this rate, the variable costs of X2 department allocated to Z1 and Z2 departments are:

Z1 department variable costs = 38 service requests in Z1 department * $833.33 per service request =

$31,666.54 Z2 department variable costs = 25 service requests in Z2 department * $833.33 per

service request = $20,833.25

Step 4: Allocate the fixed costs of X2 department based on the number of computers

Fixed cost allocation rate for X2 department = Total fixed costs of X2 department / Number of

computers in X2 department = $27,500 / 20 = $1,375 per computer

Using this rate, the fixed costs of X2 department allocated to Z1 and Z2 departments are:

Z1 department fixed costs = 25 computers in Z1 department * $1,375 per computer = $34,375 Z2

department fixed costs = 30 computers in Z2 department * $1,375 per computer = $41,250

Therefore, the total costs allocated to the operating departments are:

Z1 department costs = $57,609.38 + $39,301.98 + $31,666.54 + $34,375 = $162,952.90 Z2

department costs = $36,847.74 + $31,071.30 + $20,833.25 + $41,250 = $130,002.29

Q3. Provide a numerical example of special order decisions and make or buy decisions and
explain how these decisions are backed by quantitative and qualitative considerations.
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(4 Marks)

Note: Your answer must include suitable numerical examples. You are required to assume values
of your own and they should not be copied from any sources.

(Week 8, Chapter
4)

Answer:

Special Order Decisions: Special order decisions are made when a company receives a request from

a customer to supply a product or service at a lower price than the standard price. To make a

decision, the company must consider both quantitative and qualitative factors (Graneheim &

Lundman, 2004).

For example, let's say that a company produces 10,000 units of a product for $50 each and sells

them at a standard price of $75 per unit. The company receives a special order for 1,000 units at $60

per unit. The company must consider the following factors:

Quantitative Factors:

The cost of manufacturing each unit, which is $50

The revenue generated from the special order, which is $60,000

The impact of the special order on the company's capacity and production schedule. In this case, the

company can easily accommodate the additional 1,000 units without affecting its existing production

schedule.

Qualitative Factors:

The impact of the special order on the company's reputation. The company must ensure that it is not

sacrificing its reputation by accepting a lower price for its product.

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The possibility of future business with the customer. The company must consider whether the special

order could lead to future business with the customer, which could make the lower price worthwhile.

The impact of the special order on the company's existing customers. The company must consider

whether the special order could upset its existing customers who are paying the standard price.

If the quantitative analysis shows that the company can manufacture and sell the 1,000 units at a

profit and the qualitative analysis shows that the special order will not have a negative impact on the

company's existing customers or reputation, the company may accept the special order.

Make or Buy Decisions:

Make or buy decisions are made when a company must decide whether to manufacture a product or

service in-house or to outsource it to a supplier. This decision is also based on both quantitative and

qualitative factors.

For example, let's say that a company produces a component in-house for $10 per unit. The company

receives a quote from a supplier to manufacture the same component for $8 per unit. The company

must consider the following factors:

Quantitative Factors:

The cost of manufacturing the component in-house, which is $10 per unit

The cost of outsourcing the component to the supplier, which is $8 per unit

The quality and reliability of the supplier's product. The company must ensure that the supplier's

product meets the company's quality standards.

The impact of outsourcing on the company's capacity and production schedule. The company must

ensure that outsourcing the component does not negatively impact its production schedule or

capacity.
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Qualitative Factors:

The impact of outsourcing on the company's reputation. The company must ensure that outsourcing

the component does not negatively impact its reputation or the quality of its final product. The

possibility of future business with the supplier. The company must consider whether outsourcing the

component could lead to future business with the supplier.

The impact of outsourcing on the company's existing employees. The company must consider

whether outsourcing the component could lead to layoffs or affect the morale of its existing

employees.

If the quantitative analysis shows that outsourcing the component to the supplier will result in cost

savings and the qualitative analysis shows that outsourcing will not have a negative impact on the

company's reputation or existing employees, the company may decide to outsource the component.

On the other hand, if the company values the control and quality of in-house manufacturing and does

not want to rely on a third-party supplier, it may decide to keep manufacturing the component in-

house. In conclusion, both special order decisions and make or buy decisions involve analyzing both

quantitative and qualitative factors. Quantitative factors such as cost and revenue

Q4. K&C Ltd. is working on a budget for the current year. The following information is linked
to budget preparation: (4
Marks)

(Week 10, Chapter 10)

Budgeted selling price per unit = SAR 450 per unit

Total fixed costs = SAR 275,000

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Variable costs = SAR 150 per unit

Required:

You are required to prepare a flexible budget for 1,000, 1,500, 2,000, and 2,500 units.

Answer:

A flexible budget is a type of budget that adjusts for changes in sales volume or other factors. It

allows a business to determine the impact of different levels of sales on revenues and expenses. K&C

Ltd. is working on a budget for the current year, and we are given the following information to

prepare a flexible budget for the company (Horngren, 2007):

Budgeted selling price per unit = SAR 450 per unit Total fixed costs = SAR 275,000 Variable costs =

SAR 150 per unit

To prepare a flexible budget, we need to determine the total cost of producing 1,000, 1,500, 2,000,

and 2,500 units. We can do this by using the formula:

Total cost = Total fixed cost + (Variable cost per unit x Number of units)

Using this formula, we can prepare a flexible budget for K&C Ltd. as follows:

Number of Units: 1,000

Total fixed cost = SAR 275,000 Variable cost per unit = SAR 150 Total variable cost = SAR 150 x

1,000 = SAR 150,000 Total cost = SAR 275,000 + SAR 150,000 = SAR 425,000

Number of Units: 1,500

Total fixed cost = SAR 275,000 Variable cost per unit = SAR 150 Total variable cost = SAR 150 x

1,500 = SAR 225,000 Total cost = SAR 275,000 + SAR 225,000 = SAR 500,000

Number of Units: 2,000

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Total fixed cost = SAR 275,000 Variable cost per unit = SAR 150 Total variable cost = SAR 150 x

2,000 = SAR 300,000 Total cost = SAR 275,000 + SAR 300,000 = SAR 575,000

Number of Units: 2,500

Total fixed cost = SAR 275,000 Variable cost per unit = SAR 150 Total variable cost = SAR 150 x

2,500 = SAR 375,000 Total cost = SAR 275,000 + SAR 375,000 = SAR 650,000

In summary, we have prepared a flexible budget for K&C Ltd. based on the given information. The

flexible budget helps the company to plan for different sales volumes and adjust its expenses

accordingly. It can also help the company to evaluate its performance by comparing actual results to

the flexible budget.

References

Graneheim, U. H., & Lundman, B. (2004). Qualitative content analysis in nursing research: concepts,

procedures and measures to achieve trustworthiness. Nurse Education Today, 24(2), 105–

112. https://doi.org/10.1016/j.nedt.2003.10.001

Horngren, C. T. (2007). Introduction to Management Accounting. Routledge EBooks, 94–116.

https://doi.org/10.4324/9780080473307-10

Kaplan, R. C., & Cooper, R. L. (1992). Activity-based Systems: Measuring the Costs of Resource

Usage. Accounting Horizons. https://ci.nii.ac.jp/naid/10020986445

Mishra, B. K., & Vaysman, I. (2001). Cost-System Choice and Incentives-Traditional vs. Activity-

Based Costing. Journal of Accounting Research, 39(3), 619–641.

https://doi.org/10.1111/1475-679x.00031
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