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Posted: April 27th, 2023
Q1. Assume yourself to be a cost manager of ARAMCO and you are in the task of Cost Classifications. Explain how the following costs would help you as cost manager to make decision. (2 Marks)
1. Product Vs Period Cost
2. Prime Vs Conversion Cost
3. Committed Vs Discretionary Cost
Answer:
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Q2: A fresh graduate employed as an accountant of a manufacturing company and is working on over applied and under applied overheads.
Explain how you would assist him/her in computing over applied and under applied overheads. Give numerical examples (2 Marks)
Answer:
Q3.a. Latif Company has two products: A and B. The company uses activity-based costing. The estimated total cost and expected activity for each of the company's three activity cost pools are as follows:
Required:
1. Compute POHR per activity (Round off to two decimal places)
2. Calculate the overhead cost per unit, if the company produces 1,000 units of product A and 500 units of product B. (5 MARKS)
Answer:
Q4. Explain Equivalent Units of Production and its computation using weighted average method and FIFO method. (2 Marks)
Answer
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Q5. A) ‘Cost Structure and Profit Stability’ is one of the most import strategy of a corporations. Explain how managers, maintain cost structure for stability in profit during both good and bad years. (2 Marks)
Answer:
Q5. B) The following is Allison Corporation's contribution format income statement for last month:
Account title Amount in SR
Sales 850,000
Variable Cost 250,000
Contribution Margin 600,000
Fixed Expenses 450,000
Net operating Income 150,000
The company has no beginning or ending inventories. The company produced and sold 15,000 units last month.
Required: (2 Marks)
i. Compute Margin of Safety.
ii. What is the company's degree of operating leverage?
Product Vs Period Cost:
As a cost manager of ARAMCO, understanding the difference between product and period costs would help me in making better decisions related to pricing, product mix, and financial reporting. Product costs are costs directly related to the production of a product, such as direct materials, direct labor, and manufacturing overhead. These costs are assigned to the inventory and become part of the cost of goods sold when the product is sold. Period costs, on the other hand, are not directly related to production and are expensed in the period they are incurred. Examples of period costs include selling and administrative expenses. By distinguishing between these two types of costs, I can make better decisions about pricing, product mix, and inventory management.
Prime Vs Conversion Cost:
Understanding the difference between prime and conversion costs is important in determining the cost of production and improving efficiency. Prime costs are the direct costs of materials and labor needed to produce a product, while conversion costs include direct labor and manufacturing overhead. By separating these two costs, I can better understand the cost drivers of production and make decisions that reduce waste and increase efficiency.
Committed Vs Discretionary Cost:
Differentiating between committed and discretionary costs is essential in understanding the long-term financial obligations of the company. Committed costs are those that are necessary for the company to operate, such as fixed costs for rent or salaries. Discretionary costs, on the other hand, are those that are not necessary for the company's operation, such as advertising or research and development. By separating these costs, I can better understand the company's financial obligations and make decisions that ensure the company's long-term financial stability.
To assist a fresh graduate in computing over applied and under applied overheads, I would explain that overhead costs are estimated at the beginning of the year based on the expected level of activity, and actual overhead costs are recorded at the end of the year. Over applied overheads occur when the estimated overhead costs are greater than the actual overhead costs, and under applied overheads occur when the estimated overhead costs are less than the actual overhead costs.
To calculate over applied or under applied overhead, the graduate would need to compare the estimated overhead costs with the actual overhead costs and adjust for any differences. For example, if the estimated overhead costs were SR 100,000 and the actual overhead costs were SR 90,000, there would be an under applied overhead of SR 10,000.
Overhead cost per unit:
Product A:
Activity 1: 200 hours x SR 20 per hour = SR 4,000
Activity 2: 6 setups x SR 10 per setup = SR 60
Activity 3: 4 orders x SR 30 per order = SR 120
Total overhead cost = SR 4,180
Overhead cost per unit = SR 4.18
Product B:
Activity 1: 100 hours x SR 20 per hour = SR 2,000
Activity 2: 3 setups x SR 10 per setup = SR 30
Activity 3: 2 orders x SR 30 per order = SR 60
Total overhead cost = SR 2,090
Overhead cost per unit = SR 4.18
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