Cost Accounting

RAK
SBS/ABS – BBA
Assignment – 2021

STUDENT ID: 21040154

UNIT TITLE: COST ACCOUNTING

NAME (IN FULL): AUGUSTINE JOHNY

Table of Contents
Question 1:................................................................................................................................... 3
Question 2:................................................................................................................................... 6
Question 3:................................................................................................................................... 7
Question 4:................................................................................................................................... 9
Question 5:................................................................................................................................. 12
Question 6:................................................................................................................................. 13
Question 8:................................................................................................................................. 14
Reference ................................................................................................................................... 18

Answer all the questions. Each question carries 13 marks.

Question 1:
A) The Alpha Company uses a periodic inventory system. The beginning balance of
inventory and purchases made by the company during the month of July, 2020 are
given below:
July 01: Beginning inventory, 625 units @ $32 per unit.
July 18: Inventory purchased, 775 units @ $36 per unit.
July 25: Inventory purchased, 580 units @ $39 per unit.
The Delta Company sold 1,375 units during the month of July.
Required: Compute inventory on July 31, 2020 and cost of goods sold for the month of
July using following inventory costing methods:
First in, first out (FIFO) method
Last in, first out (LIFO) method
B) What is the impact of valuing the Inventory under each of the methods for the above
organization?

Ans.) A.)
Number of units in ending inventory:
Ending Inventory = Beginning inventory + Purchases made during the month –
Units sold during the month
Purchases made during the month = 775 + 580 = 1355
Ending Inventory = 625 + 1355 – 1375
= 605 Units
First in, first out (FIFO) method
a. Computation of inventory on July 31, 2020 (i, e., ending inventory) under FIFO:
Most recent cost, July 25 2020:
605 Units * $39.00 = $23,595.00

b. Computation of cost of goods sold (COGS) for July 31, 2016 under FIFO:
Cost of Units on July 01, 2020 (Beginning Inventory):
625 Units * $32.00 $20,000.00
(Add) Cost of Units Purchased During the
Month:
775 Units * $36.00 $27,900.00
580 Units * $39.00 $22,620.00
Total Cost of Units Available for Sale $50,520.00
(Less) Cost of Units in Ending Inventory $23,595.00
Total Cost of 1375 Units Sold During the
$26,925.00
Month of July

Last in, first out (LIFO) method

a. Computation of inventory on July 31, 2020 (i, e., ending inventory) under LIFO:
Earliest Cost, July 01, 2020 (Beginning Inventory):
625 Units * $32.00 $20,000.00
Next Earliest Cost, July 18th 2020:
195 Units * $36.00 $7,020.00
Total Cost of 605 Units in Inventory on July
$27,020.00
31, 2020
b. Computation of cost of goods sold (COGS) for July 31, 2016 under LIFO:
Cost of Units on July 01, 2020 (Beginning Inventory):
625 Units * $32.00 $20,000.00
(Add) Cost of Units Purchased During the
Month:
775 Units * $36.00 $27,900.00
580 Units * $39.00 $22,620.00
Total Cost of Units Available for Sale $50,520.00
(Less) Cost of Units in Ending Inventory $27,020.00
Total Cost of 1375 Units Sold During the
$23,500.00
Month of July

Ans.) B.) In the First in, first out (FIFO) method, is the method in which the
company assumes that the oldest products in the inventory are the products that
are sold first and the company follows the production costs based on that. FIFO
is considered to be the method that is easy to use and implement in a firm. It is
only logical for a firm to sell their older products as soon as possible since it is
likely to become obsolete or stale, as such it would lose value.
In the Last in, first out (LIFO) method, is the method in which the company assumes
that the newest products in the inventory are the products that are sold first and
the cost of production will be calculated based on that. LIFO covers the more recent
inventory costs first before the older inventory costs. Cost of newer inventory is
generally higher than the cost of older inventory, and because of this the profits
get reduced. However this may lead to reduced tax to be paid by the company.
Question 2:
A) Sheikh Zayed University in UAE has five departments: Accounting, Economics,
Finance, Management, and Marketing.
Each department chairperson is responsible for the department’s budget preparation.
Indicate whether each of the following costs incurred in the Marketing Department
is Direct or Indirect to the department:
a. Marketing faculty salaries
b. Marketing chairperson’s salary
c. Cost of computer time of university server used by members of the department
d. Cost of office assistant salaries (office assistants are shared by the entire university)
e. Cost of travel by department faculty paid from externally generated funds contributed
directly to the department
f. Cost of equipment purchased by the department from allocated federal funds
g. Depreciation allocation of the university building cost for the number of offices used
by department faculty
h. Cost of periodicals/books purchased by the department
i. Long-distance telephone calls made by marketing faculty.
B) Discuss the importance of Classification of Costs in the case of the above University.

Ans.)
a. Marketing faculty salaries – Direct
b. Marketing chairperson’s salary – Indirect
c. Cost of computer time of university server used by members of the department
– Indirect
d. Cost of office assistant salaries (office assistants are shared by the entire
university) – Indirect
e. Cost of travel by department faculty paid from externally generated funds
contributed directly to the department – Direct
f. Cost of equipment purchased by the department from allocated federal funds –
Indirect
g. Depreciation allocation of the university building cost for the number of offices
used
by department faculty – Direct
h. Cost of periodicals/books purchased by the department – Direct
i. Long-distance telephone calls made by marketing faculty. – Direct

Ans.) B.) Classification of Costs is the process of putting the various costs that are
present in a business into various categories according to their nature, type,
frequency, etc. Any given cost can be allotted into several categories. Cost can be
categorized into two things: Direct and Indirect cost. Direct cost is when the cost
is directly associated with the production, for example, the raw materials needed,
the labor expenses etc. are all direct costs. Indirect cost is when the cost is not
directly associated, rather the cost is related to a production unit or department.
An example of indirect cost would be rent, lighting, fuel and others. Many overhead
costs are considered indirect cost.

Question 3:
A) Adam Corporation is trying to improve its Inventory Control system and has installed
an online computer at its retail stores. Adam anticipates sales of 52,000 units per year,
an ordering cost of $9 per order and carrying costs of $1.80 per unit.
a) Calculate the Economic Order Quantity.
b) How many orders will be placed during the year?
c) What will the Average Inventory be?
d) What is the total cost of ordering and carrying inventory?
B) How does calculating the Economic Order Quantity help any organization to take better
control of its assets especially Inventory?

Ans.) A)
a) Calculate the Economic Order Quantity.
EOQ = SQURT(2 * Annual Consumption * Ordering Cost Per Order / Carrying Cost
Per Unit Per Year)
 = SQURT(2 * 52,000 * 9 / 1.80)
= SQURT(936,000 / 1.80)
= SQURT(520,000)
= 721 Units
(SQURT = SQUARE ROOT)
b) How many orders will be placed during the year?
No. of Orders = Annual Consumption / EOQ
= 52,000 / 721
= 72 Orders
c) What will the Average Inventory be?
Average Inventory = EOQ / 2
= 721 / 2
= 360 Units
d) What is the total cost of ordering and carrying inventory?
Total Ordering and Carrying Cost = Total Ordering Cost + Total Carrying Cost
= (72 * 9) + (360 * 1.80)
= 648 + 648
= $1,296.00
Ans.) B) The best order amount for a corporation to purchase in order to reduce
inventory costs such as holding charges, shortage costs, and order fees is known
as the economic order quantity (EOQ). Inventory control, or the control of the
ordering, storing, and use of a company's inventory, necessitates the use of EOQ.
Inventory management is in charge of determining how many units a company can
add to its inventory for each batch order in order to lower total inventory
expenditures.
The EOQ model aims to ensure that the appropriate cost of stock is ordered per
batch, so that a company will not have to place orders too frequently or have an
excess of inventory on hand. It is assumed that there is a trade-off between
inventory keeping costs and inventory setup costs, and that when both setup and
holding costs are minimized, overall inventory cost is reduced.
We need to know the setup costs, demand rate, and holding costs to compute the
EOQ for inventory. All of the expenditures connected with actually purchasing the
merchandise, such as packing, delivery, shipping, and processing, are referred to
as setup charges. The amount of inventory a company is selling each year is
referred to as the demand rate.
All of the costs involved with keeping extra goods on hand are referred to as
holding charges. Costs such as warehousing and logistics, insurance, material
handling, inventory write-offs, and depreciation are among them. Ordering a big
quantity of inventory raises a company's holding costs, but ordering smaller
quantities of inventory more frequently raises the company's setup costs. The EOQ
model determines the quantity that reduces both types of costs to the lowest
possible level.
The EOQ assists businesses in reducing the cost of acquiring and maintaining
inventory. The cost per unit of ordering a product decreases as the total amount of
the order increases, as indicated by the economic notion of economies of scale.
The higher the expense of holding and carrying your inventory, the larger the
overall quantity of an order.

Question 4:
A) The following data are from Partners Corporation, a manufacturer, for the month of
June:
Direct materials used $127,000
Supervisors’ salaries $8,500
Machine operators’ wages $190,000
Sales office rent and utilities $28,000
Machine depreciation $30,000
Secretary to the Chief Executive Officer salary $2,850
Factory insurance $13,500
Required:
Compute the Prime costs.
B) Differentiate between Prime Cost and Factory Overhead Costs (FOH) and what role
does it play in cost management.

Ans.) A) Prime Costs:

Direct materials used $127,000
Machine operators’ wages $190,000
Prime Cost = 127,000 + 190,000
= $317,000.00
Ans.) B) Prime costs are the expenses incurred by a company that are directly
connected to the materials and labor utilized in manufacturing. It refers to the
expenses of a manufactured product that are estimated to provide a company's
best profit margin. The prime cost is a calculation of the direct expenses of raw
materials and labor in the manufacture of a product. Indirect expenditures, such as
advertising and administrative fees, are not included in direct costs. A prime cost
is the entire direct costs of producing a saleable item, which might be fixed or
variable. Prime costs are a technique for businesses to calculate the overall cost
of the manufacturing inputs required to produce a specific output. A firm can
establish prices that generate targeted profits by evaluating its prime expenses. A
firm can raise its profit or undercut its competitors' prices by decreasing its prime
expenses. To guarantee that they are making a profit, businesses must determine
the prime cost of each product created Self-employed people, such as craftsmen
who make and sell custom-made furniture, frequently utilize the prime cost
calculation to guarantee that they are earning the hourly rate they want while still
benefiting from each piece they make. Indirect expenditures are not included in
prime prices, such as electricity, management wages, and delivery costs. Because
indirect costs are difficult to define and assign, they are omitted from the prime
cost calculation.
Formula: Prime cost = direct materials cost + direct labor cost
The prime cost formula is simply the total of all direct production costs spent in
the creation of commodities.
The expenditures spent throughout the production process, excluding direct labor
and direct supplies, are referred to as factory overhead. Normally, factory overhead
is grouped into cost pools and assigned to the units produced during the time
period. When the manufactured units are eventually sold as completed products or
written off, it is charged to expenditure. The direct costing approach avoids
allocating manufacturing costs to units produced, whereas absorption costing
requires it. When preparing financial statements in accordance with the major
accounting standards, it is necessary to allocate manufacturing overhead.
Depending on the scale and complexity of a manufacturing operation, as well as
the degree of detail at which expenses are documented, the spectrum of possible
industrial overhead costs can be extremely broad. The amount actually allocated
to inventory once manufacturing overhead is allocated will differ from the standard
amount that had been budgeted to be allocated. A spending variance or an
efficiency variance is the source of this discrepancy. Because the actual amount
of manufacturing overhead cost incurred during the time differed from the standard
amount that had been planned at some point in the past, the spending variation
occurred. Because the number of units to which the factory overhead was assigned
differed from the normal quantity of output predicted when the allocation rate was
set up, the efficiency variance occurred. Accounting rules require the use of factory
overhead, but it adds little value to the knowledge of overhead expenses, therefore
it's better to keep the factory overhead allocation technique as simple as possible.
A limited number of highly aggregated manufacturing overhead accounts should
ideally be combined into a single cost pool and then distributed using a
straightforward technique. In addition, by charging all immaterial manufacturing
expenses to expenditure as incurred, the amount of factory overhead analysis and
recordation labor may be reduced.

Formula: Manufacturing Overhead Rate = Overhead Costs / Sales x 100

Question 5:
Explain the significance of both Financial Accounting and Cost Accounting and what the
differences between them are.
Ans.) Financial Accounting is the branch of accounting which has the process of
recording, summarizing and reporting on the many transactions that occur during
a business’ operations during a period of time. All of the recorded transactions are
summarized within the financial statements, which include the balance sheet, profit
and loss statement and the cash flow statement. These financial statements
indicate the organization’s performance during a given period.
Cost Accounting is part of management accounting where it estimates the total
production cost of a company through the evaluation of the many variable costs
and fixed costs that are associated with the production of the company. This type
of accounting is used by the management to find out all the costs that involve the
process of production. Cost accounting will first calculate the costs by themselves,
then the cost of input is compared against the output and this metric is used to
measure the financial performance and it is used for future decision making.
Some of the main differences between Financial Accounting and Cost Accounting
are:
i) The Target Audience: The Target Audience for Financial Accounting is external.
The audience may consist of investors, creditors, the government, etc. The Target
Audience for Cost Accounting is internal, as in it is primarily used by the
management team in order to run the business.
ii) Detail: Financial Accounting focuses on reporting the financial position of the
entire business, and as such it would not have minute details. In Cost Accounting,
it tends to be more detailed as it involves the information for individual products,
customers, subsidiaries, etc.
iii) Format: Financial Accounting follows very specific rules and formats which are
generally in-line with the Generally Accepted Accounting Principles or the
International Financial Reporting Standards. Cost Accounting does not follow any
strict formats and tends to be more free form and tailored to the management’s
specifications.
 iv) Contents of the report: In Financial Accounting, a report would be the summary
of all the financial information which were recorded. In Cost Accounting, a report
may have both financial and operational information.
v) Timing of the reports: Financial Reports are always issued at the end of a
reporting period. Cost Accounting Reports can be issued whenever it is needed by
the management.

Question 6:
A manufacturer purchases 2000 units of a certain component p.a. @ AED 50 per unit
from outside supplier. The annual usage is 2000 units, order placing and receiving cost
is AED 200 per order and cost of holding one unit of the component for one year is AED
5. Calculate the Economic Order Quantity by tabular method. Also calculate the number
of orders to be placed each year.
Ans.)
Annual Number Units Average Carrying Order Total Annual
Consumption of Per Inventory Cost @AED. Placing & Costs
Orders Order Units 5/Unit on Receiving
P.A Average Cost @ AED.
Inventory 200/Order
2000 1 2000 1000 AED. 5000 AED. 200 AED. 5200
2 1000 500 AED. 2500 AED. 400 AED. 2900
3 667 333 AED. 1665 AED. 600 AED. 2265
4 500 250 AED. 1250 AED. 800 AED. 2050
5 400 200 AED. 1000 AED. 1000 AED. 2000*
6 333 166 AED. 1665 AED. 1200 AED. 2865
* The Total Annual Cost of AED. 2000 is the Lowest when Number of Orders Placed
are 5 in a Year. This Means That the Quantity Per Order of 400 [5 Orders Per Year]
is the Economic Order Quantity.
Question 7:
With regards to Material Inventory, explain what is meant by the terms Reorder Level,
Maximum Level, Minimum Level and Average Stock Level. Explain the significance of
each for any Organization.
Question 8:
A) What is the relevance of Primary and Secondary Distribution of Overheads in an
organization? Why is it done?
Ans.) A) Essential appropriation of overheads alludes to assignment and
allocation of overhead costs among creation and administration divisions of an
association. This cycle includes assignment of overheads which can be
straightforwardly related to a specific office and allotment of normal thing of
overheads on fitting premise among every one of the offices. The whole
interaction of designation and division is efficiently introduced in a perform
which is known as perform of overheads dissemination synopsis or essential
conveyance rundown. This performs is displayed underneath for better
agreement: While getting ready overheads conveyance synopsis, note that the
immediate expenses of the help divisions ought to be considered as overheads.
Thus the immediate material, direct work and direct costs of the assistance
divisions are dispensed straightforwardly and recorded in the overheads
circulation rundown since these are overheads according to creation perspective.
However, the immediate material, direct work and direct costs of the creation
divisions should be prohibited from this outline since these are not overheads.
The overhead expenditures are allocated across all departments or cost centers in
the primary distribution of overbids, whether it is the production department or the
service department. Production departments, on the other hand, are responsible
for creating items, whilst service departments help them in this process. As a
result, service department expenses must eventually be distributed over
production, and only then can overheads be charged to production. Secondary
distribution of overheads is the process of allocating service department
expenditures across manufacturing departments. In other words, following
primary distribution, secondary distribution is the re-allocation of service
department costs among the production departments. Some typical apportionment
bases are used for calculating secondary distribution.
B) Labor Cost is a very important element of the Total cost in a company. How is this
classified – explain with examples. Also, describe the ways in which this cost is monitored
and tracked by the organization?
Ans.) B) Labor cost is a crucial number that finance and accounting experts
compute to estimate a company's direct and indirect labor costs. Wages and
benefits for employees who are directly involved in the production of the product
or service commodity are included in the direct cost of labor. The indirect cost of
labor refers to the wages given to workers who support the product but aren't
directly involved in its production. Grasp labor costs assists firms in pricing
products, and without an understanding of direct and indirect costs, companies
may find it difficult to arrive at the correct product cost. As a result, having a
thorough grasp of labor costs and how to use them is advantageous to the
economy.
Labor costs are further divided into fixed and variable costs:
• Fixed: Fixed expenses are generally contracted costs, although they can also
include known necessary costs.
• Variable costs rise and fall in response to factors such as production demand and
economic conditions
Direct labor cost - Expenses obtained directly from supply chain personnel
participating in manufacturing are referred to as direct labor costs. Assemblers,
manufacturers, heavy machinery operators, fabricators, craftsmen and artisans,
delivery drivers, and other logistical personnel are all needed to get items into the
hands of customers.
Indirect labor cost - Any employee whose function is not critical to the actual
manufacturing of a product is considered indirect labor. These workers continue
to perform vital tasks such as administration, supervision, and finance, but they
are not involved in the supply chain. The salaries of workers in the human
resources department are an example of indirect labor expenses.
Fixed labor cost - Labor expenses that are unlikely to fluctuate over time are known
as fixed labor costs.
Variable labor cost - Variable labor costs rise and fall in tandem with output. An
hourly employee's rate is an excellent illustration of a frequent variable labor
expense. Several sectors, particularly around shopping holidays, rely on flexible
labor. Retailers, restaurants, manufacturing enterprises, and other businesses are
among them. During peak season, businesses either recruit hourly workers directly
or engage with agencies to locate temporary workers to bridge production gaps.
Simple formula for cost of labor
The following is a basic calculation that assumes the cost of benefits and payroll
taxes are rolled into the average hourly rate, or that the company doesn't have
additional benefits or payroll tax costs.
Formula: Cost of Labor = (total sales x percentage of labor) / hourly average of
worker salaries
Basics of Tracking Labor Costs Correctly to Improve Profitability
- Labor management does not have to be complicated or expensive. As with most
things in life, information is power, so keeping a few things in mind is the key to
having a grasp on one of your company's greatest costs.
O Understand the labor cost tracking formula. Calculating your labor % is based
on one formula: Total labor cost in dollars divided by revenue in dollars multiplied
by 100 equals labor cost percentage. If you have a point of sale system with an
integrated time management component, it's possible that the system is already
computing this proportion for you. Perhaps all you need is a little digging in the
handbook or help screens to find the information you want.
O Break down large projects into smaller pieces. While it is seldom necessary to
inform clients of the numerous little activities that go into finishing their project, it
is necessary to break down a bigger operation into its components in order to
provide accurate estimates and discover inefficiencies. Coding these jobs-within-
jobs in a way that makes sense for your organization and your employees will give
a simple and simplified form of data visualization as time goes on, and will
eventually help you estimate completion deadlines.
O Time clock applications for mobile devices. Mobile solutions may be a huge help
in obtaining a clear view of labor expenses, especially if you have a company with
a lot of field personnel or a large shop floor with a lot of manufacturing staff.
Employees may track their time remotely using these tools, which interface with
current business planning and management systems. This lowers systemic
mistakes by saving time spent sending data back and forth from timesheets and
time management systems, or by eliminating the need to travel to a time clock or
desktop computer to log in and out. Furthermore, by their very nature, they can
track efficiency in real time, which may be a huge help in adjusting profitability.
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