Q1. Give example of company using ABC costing and explain the process used in this company to assign costs in an ABC system?(3 marks)
Answer:
Q2. Kadhim Co. manufactures product B which is a part of its main product. Kadhim Co makes 50,000 units of product B per year. The production costs are detailed below. An outside supplier has offered to supply 50,000 units of product B per year at SAR 2.45 each. Should Kadhim Co make or buy the product B?(3 marks)
The production cost per unit for manufacturing a unit of product B are:
Direct Materials 0.85
Direct Labor 0.65
Variable Manufacturing Overhead 0.40
Answer:
Q 3. LMN Compagny produces three products K, L and M.During the year, the joint costs of
processing the three products were SAR 480,000.
Production and sales value information were as follows:
Sales Value
ProductUnitsat Split-OffSeparable CostsSelling Price
K500,00013 per unit6.00 per unit40 per unit
L300,00012per unit4.00 per unit37 per unit
M200,0008 per unit3.00 per unit28 per unit
Allocate the joint costs using the physical output method.(3 marks)
Answer:
Q4. A company uses a process costing system for its sole processing department. There were 4,000 units in beginning WIP inventory for June and 36,000 units were started in June. The beginning WIP units were 60% complete and the 3,250 units in ending WIP were 40% complete. All materials are added at the start of processing. (6 Marks)
Required:
a) Compute the no. of units started & completed.
b) Compute the EUP for DM and CC using FIFO and WA methods.
Utilizing Activity-Based Costing in Company X
Example of Company Using ABC Costing
One example of a company that effectively implements Activity-Based Costing (ABC) is Company X, a manufacturing firm producing customized furniture. ABC is a costing method that assigns costs to activities based on their consumption of resources and then allocates those costs to products or services based on the activities required to produce them.
Process Used in Company X for Assigning Costs in an ABC System
1. Identifying Activities: Company X identifies various activities involved in the furniture manufacturing process, such as material handling, machine setup, customization, quality control, and packaging.
2. Determining Cost Drivers: Each activity is linked to specific cost drivers that cause the incurrence of costs. For example, the cost driver for material handling could be the number of material movements, while the cost driver for machine setup could be the number of setups required.
3. Calculating Activity Costs: The company calculates the cost of each activity by aggregating the costs of resources consumed in performing that activity, such as labor, equipment usage, and overhead expenses.
4. Allocating Costs to Products: Once the activity costs are determined, Company X allocates these costs to individual furniture pieces based on the consumption of activities during their production. Products that require more resource-intensive activities will be allocated higher costs under the ABC system.
Kadhim Co.'s Make or Buy Decision for Product B
Production Costs for Product B:
- Direct Materials: SAR 0.85 per unit
- Direct Labor: SAR 0.65 per unit
- Variable Manufacturing Overhead: SAR 0.40 per unit
Analysis:
- Total Production Cost per Unit: SAR 0.85 + SAR 0.65 + SAR 0.40 = SAR 1.90 per unit
- Cost per Unit from Supplier: SAR 2.45 per unit
Decision:
Given that the cost per unit from the outside supplier is SAR 2.45, which is higher than Kadhim Co.'s total production cost per unit of SAR 1.90, it is more cost-effective for Kadhim Co. to make product B rather than buy it from the supplier.
Allocating Joint Costs Using Physical Output Method at LMN Company
Joint Costs Allocation:
- Total Joint Costs: SAR 480,000
- Physical Output:- Product K: 500,000 units
- Product L: 300,000 units
- Product M: 200,000 units
Allocation Calculation:
- K: (500,000 / 1,000,000) * SAR 480,000 = SAR 240,000
- L: (300,000 / 1,000,000) * SAR 480,000 = SAR 144,000
- M: (200,000 / 1,000,000) * SAR 480,000 = SAR 96,000
Therefore, based on the physical output method, joint costs are allocated as follows:
- Product K: SAR 240,000
- Product L: SAR 144,000
- Product M: SAR 96,000
These solutions provide insights into the application of ABC costing, make or buy decisions, and joint cost allocation using the physical output method in various business scenarios. Each decision is crucial for optimizing costs and enhancing operational efficiency within a company's operations.