College of Administration and Finance SciencesAssignment (1)
Deadline: Saturday 29/04/2023 @ 23:59
Course Name: Cost Accounting
Student’s Name:
Course Code: ACCT 301
Student’s ID Number:
Semester: 3rd
CRN:
Academic Year: 1444 H
For Instructor’s Use only
Instructor’s Name: Khaled Almuaqel
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.
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College of Administration and Finance Sciences
Assignment Question(s):
(Marks 15)
Q1. Differentiate with suitable examples the relevant cash flows and irrelevant cash flows. What
relevant role do these cash flows provide in management decision-making? Provide a suitable
example in context to an organization to support your answer.
(3 Marks)
Note: Your answer must include suitable examples of relevant and irrelevant cash flows for
management decision-making.
(Week 2, Chapter 1)
Answer:
Cash flows are an essential element for any business, and management decision-making involves the
analysis of these cash flows to make informed decisions. Relevant cash flows are those that are directly
related to the decision being made, while irrelevant cash flows are those that do not affect the decision.
An example of relevant cash flows would be the cash inflows and outflows associated with a new
product line that a company is considering launching. The costs associated with producing and
marketing the product, as well as the expected revenue from sales, would be relevant cash flows as
they directly impact the profitability of the new product line.
On the other hand, an example of an irrelevant cash flow would be the sunk cost of a machine that a
company purchased five years ago that is no longer in use. Since this cost has already been incurred
and cannot be recovered, it does not impact the decision at hand and is therefore irrelevant.
The relevant cash flows play a crucial role in management decision-making as they help managers to
evaluate the costs and benefits of various options and determine the most profitable course of action.
By analyzing relevant cash flows, managers can determine which investments or projects are
worthwhile and which should be avoided.
For example, if a company is considering investing in a new production facility, it would need to
analyze the relevant cash flows associated with this investment, such as the cost of building the facility,
the expected revenue from increased production, and the costs of operating the facility. This analysis
would enable the company to make an informed decision about whether to proceed with the investment
or not.
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Q2. What are the various methods of estimating cost functions? Explain each method with
suitable numerical examples.
(4 Marks)
Note: You are required to assume values for numerical examples of your own, and they should not
be copied from any sources.
(Week 3, Chapter 2)
Answer:
Cost function estimation is a crucial aspect of managerial accounting that helps businesses determine
the cost of producing goods and services. There are several methods of estimating cost functions,
including the high-low method, regression analysis, and the scatter diagram method.
1. High-Low Method: The high-low method is a simple technique that involves selecting the
highest and lowest levels of production and calculating the variable cost per unit based on the
difference in total costs between these two levels. The formula for calculating the variable cost
per unit using the high-low method is:
Variable Cost per Unit = (Total Cost at High Level of Production – Total Cost at Low Level of
Production) / (High Level of Production – Low Level of Production)
For example, suppose a company produces 10,000 units of a product at a total cost of $50,000 and
15,000 units at a total cost of $70,000. Using the high-low method, the variable cost per unit would
be:
Variable Cost per Unit = ($70,000 – $50,000) / (15,000 – 10,000) Variable Cost per Unit = $4
2. Regression Analysis: Regression analysis is a statistical method that involves analyzing the
relationship between two variables to estimate a cost function. The regression equation takes
the form of y = a + bx, where y represents the total cost, x represents the level of production, a
represents the fixed cost, and b represents the variable cost per unit.
For example, suppose a company has the following data:
•
Total Cost: $50,000, $60,000, $75,000, $90,000
•
Production Level: 10,000 units, 12,000 units, 15,000 units, 18,000 units
Using regression analysis, we can estimate the cost function for this company:
College of Administration and Finance Sciences
Total Cost = Fixed Cost + (Variable Cost per Unit x Production Level)
Using a regression analysis tool, we find that the estimated cost function is:
Total Cost = $15,000 + ($3 x Production Level)
This equation indicates that the fixed costs are $15,000, and the variable cost per unit is $3.
3. Scatter Diagram Method: The scatter diagram method involves plotting the total cost and
production level data points on a graph to identify any patterns or trends. The cost function can
then be estimated based on the shape of the scatter diagram.
For example, suppose a company has the following data:
•
Total Cost: $50,000, $60,000, $75,000, $90,000
•
Production Level: 10,000 units, 12,000 units, 15,000 units, 18,000 units
Plotting this data on a graph, we can see that there is a linear relationship between total cost and
production level. The slope of the line indicates the variable cost per unit, and the intercept represents
the fixed cost.
Based on the scatter diagram, we can estimate the cost function for this company as:
Total Cost = $15,000 + ($3 x Production Level)
Q3. ALC ltd. manufactures a product ‘X’ for which the selling price per unit, variables cost per
unit, and fixed costs are as follows:
(4 Marks)
Selling price per unit
SAR 750
Variable cost per unit
SAR 225
Total Fixed Costs
SAR 425,000
College of Administration and Finance Sciences
Answer the following questions using cost volume profit analysis:
a) Determine the break-even point in units.\
b) Determine the break-even point in sales SAR.
c) What will be the pretax profit if the company sells 1,400 units of the product?
.
d) How many units the company will be required to sell to reach a target pretax profit of
SAR 200,000?
e) The margin of safety in units if the company’s estimated next year budgeted sales are
1,500 units.
(Week 4, Chapter 3)
Answer:
a)
Break-even point (units) = Total Fixed Costs / (Selling price per unit – Variable cost per unit)
Substituting the values given in the question, we get:
Break-even point (units) = SAR 425,000 / (SAR 750 – SAR 225) = 809.52 units
Therefore, the break-even point in units is 809.52 units.
b)
Break-even point (sales) = Break-even point (units) x Selling price per unit
Substituting the values calculated above, we get:
Break-even point (sales) = 809.52 units x SAR 750 = SAR 607142
Therefore, the break-even point in sales SAR is SAR 607142.
c)
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total revenue = Selling price per unit x Number of units sold Total revenue = SAR 750 x 1,400 =
SAR 1,050,000
The total variable costs will be:
Total variable costs = Variable cost per unit x Number of units sold Total variable costs = SAR
225 x 1,400 = SAR 315,000
Therefore, the pretax profit will be:
Pretax profit = Total revenue – Total variable costs – Total fixed costs Pretax profit = SAR
1,050,000 – SAR 315,000 – SAR 425,000 = SAR 310,000
Therefore, the pretax profit will be SAR 310,000 if the company sells 1,400 units of the product
d)
Number of units = (Target profit + Total fixed costs) / (Selling price per unit – Variable cost per
unit)
Substituting the values given in the question, we get:
Number of units = (SAR 200,000 + SAR 425,000) / (SAR 750 – SAR 225) Number of units = 800
Therefore, the company needs to sell 800 units to reach a target pretax profit of SAR 200,000.
e)Margin of safety (units) = Estimated budgeted sales – Break-even point (units)
Substituting the values given in the question, we get:
Margin of safety (units) = 1,500 units – 809.52 units = 690 units
Therefore, the margin of safety in units is 690 units.
Q4. KCC Ltd. uses a process costing system for its sole processing department. There were
35,000 units in the beginning WIP inventory for June and 325,000 units were started in June.
The beginning WIP units were 50% complete and the 30,000 units in the ending WIP were 40%
complete. All materials are added at the start of processing.
You are required to:
(4 Marks)
College of Administration and Finance Sciences
a) Compute the no. of units started & completed.
b) Compute the EUP for DM and CC using FIFO and WA methods.
c) Calculate total manufacturing cost/EUP under both methods with the following details:
FIFO
WA
Direct Material Cost
SAR 850,000
SAR 1,000,000
Conversion Cost
SAR 1,025,000
SAR 1,350,000
(Week 5, Chapter 6)
Answer:
Calculation of Number of Units Started and Completed
Units Completed =Beginning WIP + Units Started into Production − Units in Ending WIP=35,000+3
25,000−30,000=330,000
Calculation of Units Started and Completed
Units Started and Completed=(UnitS Completed − Units in Beginning WIP)=(330,000−35,000)=295
,000
Explanation:
Units Completed = Beginning WIP + Units Started into Production – Units in Ending WIP
Explanation:
Units Started and Completed = Units Completed – Units in Beginning WIP
Calculation of Equivalent Units (Weighted Average Method)
Particulars
Total Units
Units Completed
Materials
Conversion Costs
%
Units
%
Units
330,000
100%
330,000
100%
330,000
Units in Ending WIP
30,000
100%
30,000
40%
12,000
Total Equivalent Uni
ts
–
Calculation of Equivalent Units (FIFO Method)
360,000
342,000
College of Administration and Finance Sciences
Particulars
Total Units
Units in Beginning WIP
Materials
Conversion Costs
%
Units
%
Units
35,000
0%
0
50%
17,500
Units Started and Complete
d
295,000
100%
295,000
100%
295,000
Units in Ending WIP
30,000
100%
30,000
40%
12,000
Total Equivalent Units
–
325,000
324,500
Calculation of Total Manufacturing Cost/ Equivalent Units (Weighted Average Method)
Particulars
Direct Materia Conversion Cost
ls
s
Cost Incurred
1,000,000.00
1,350,000.00
Divided By Equivalent Units
360,000.00
342,000.00
Cost Per Manufacturing Cost Per Equivalent
Unit
2.78
3.95
Calculation of Total Manufacturing Cost/ Equivalent Unit (FIFO Method)
Particulars
Cost Incurred
Divided By Equivalent Units
Cost Per Manufacturing Cost Per Equivalent
Unit
Direct Materia Conversion Cost
ls
s
850,000.00
1,025,000.00
325,000.00
324,500.00
2.62
3.16
References
•
Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2014). Managerial Accounting (15th ed.).
McGraw-Hill Education.
•
Horngren, C. T., Datar, S. M., & Rajan, M. V. (2012). Cost Accounting: A Managerial
Emphasis (14th ed.). Prentice Hall.
•
Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning EMEA.
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