Posted: January 11th, 2023

What information is relevant for decision-making?

Assignment Question(s): (Marks 15)

Q1. What information is relevant for decision-making? Differentiate between relevant and irrelevant information for decision-making. Support your answer by explaining the information in the context of an organization.
(3 Marks)
Note: Your answer must include suitable examples of relevant and irrelevant information for decision-making. (Week 2, Chapter 1)
Answer:

Q2. A&D Ltd. is in the manufacturing of wooden products and makes several wooden items. The following values are related to a particular wooden item:
Particulars
Selling price per unit SAR 1,100
Variable cost per unit SAR 400
Total fixed costs SAR 500,000
Estimated next year’s budgeted sales 1,200 units

You are required to calculate: (4 Marks)
a) BEP in units and BEP in sales SAR
b) Degree of operating leverage
c) Margin of safety in units
d) Margin of safety in SAR (Week 4, Chapter 3)
Answer:

Q3. The information below was derived from the 2018 records of HCS Company: (4 Marks)

Month Units Produced Total Cost (SAR)
May 4,350 44,200
June 4,700 44,700
July 5,000 45,000
August 5,400 45,400
September 5,650 47,500
October 5,900 57,150
November 3,450 40,000
December 4,100 40,600

Using the high-low method of analysis, calculate
i. Variable cost
ii. Fixed cost, and
iii. Determine a cost function. (Week 3, Chapter 2)
Answer:

Q4. The following transactions are related to a particular job. You are required to make the necessary journal entries. (4 Marks)
a) The materials storeroom receives a shipment of direct and indirect materials that cost SAR 50,000.
b) Materials are sent to the stamping and assembly areas. The cost of the direct materials is SAR 5,600 and the cost of the indirect materials is SAR 3,200.
c) Wages totaling SAR 7,000 are accrued; 60% of these costs are direct labor and 40% are indirect labor.
d) Overhead costs are allocated to work in process using an allocation rate of 250% of direct labor costs.
e) Job no. 25, with a total cost of SAR 8,500 is completed.
f) Job no. 25 is shipped to the customer, who is billed for SAR 15,000.
(Week 5, Chapter 5)

Answer:
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Q1. Relevant information for decision-making is information that can affect the outcome of the decision, and has a direct impact on the specific problem or opportunity at hand. This information is useful for making informed decisions, and can help managers to identify the best course of action. On the other hand, irrelevant information for decision-making does not have an impact on the specific problem or opportunity, and does not help to inform the decision.

For example, in the context of an organization, if a company is considering launching a new product, relevant information would include market research data on consumer demand and preferences, as well as production costs and potential profit margins. In contrast, irrelevant information would include the company’s annual sales figures from the previous year, as they do not pertain to the specific decision at hand.

Q2.
a) Break-Even Point (BEP) in units: BEP = Total fixed costs / (selling price per unit – variable cost per unit) = 500,000 / (1,100 – 400) = 1,111.11 units.
BEP in sales SAR: BEP = Total fixed costs / Contribution margin ratio = 500,000 / (1,100 – 400) / 1,100 = 454.55 SAR

b) Degree of Operating Leverage (DOL) = (Change in Operating Income / Change in Sales) / (Contribution margin / Sales)
DOL = (Selling Price – Variable Cost per Unit) / (Selling Price – Variable Cost per Unit – Total Fixed Costs)
DOL = (1,100-400)/(700) = 1.57

c) Margin of Safety in Units = Budgeted Sales – Break-even Sales = 1,200 units – 1,111.11 units = 88.89 units.
Margin of Safety in SAR = Budgeted Sales – Break-even Sales = 1,200 units * 1,100 SAR/unit – 1,111.11 units * 1,100 SAR/unit = 98,000 SAR

d)

e)

f)

Q3.
i. Variable Cost = (High Total Cost – Low Total Cost) / (High Units Produced – Low Units Produced) = (57,150 – 40,000) / (5,900 – 3,450) = 4,150/2,450 = 1.69 SAR/unit
ii. Fixed Cost = Total Cost – (Variable Cost x Units Produced) = 57,150 – (1.69 x 5,900) = 40,600 SAR
iii. Cost Function: Y = 1.69X + 40,600.

Q4.
a) Materials 50,000 SAR (Debit)
Accounts Payable 50,000 SAR (Credit)

b) Direct Materials 5,600 SAR (Debit)
Indirect Materials 3,200 SAR (Debit)
Materials 8,800 SAR (Credit)

c) Wages Payable 7,000 SAR (Debit)
Direct Labor Cost 4,200 SAR (Debit)
Indirect Labor Cost 2,800 SAR (Debit)

d) Overhead Allocated 2,000 SAR (Debit)
Direct Labor Cost 2,000 SAR (Credit)

e) Work in Process 8,500 SAR (Debit)
Direct Materials 5,600 SAR (Credit)
Indirect Materials 3,200 SAR (Credit)
Direct Labor 4,200 SAR (Credit)
Indirect Labor 2,800 SAR (Credit)
Overhead 2,000 SAR (Credit)

f) Accounts Receivable