Question

Q 1 Give a numerical example of non routine decision, Determine the relevant costs for this non routine decision and discuss the analysis (quantitative and qualitative) required to make the decision?

Q 2 Which types of companies would most likely use a process costing system? Provide examples of two Saudi Compagnies.

Explain the methods with which the cost per unit will be calculated for this type of companies. Explain how the different items of inventory will be evaluated?

Q 3 KLM Compagny has two departments, Assembly and Testing. You are given the following information about the costs of 5 activities that occur at the manufacturing plant monthly:

Activity Total Costs Total number of units of Cost Driver

Material handling SAR200, 000 400,000 parts

Supervision of direct labor 126,000 90 employees

Janitorial and cleaning 200,000 4,000 hours

Machining 300,000 7,000 machine hours

Total costs SAR826,000

The above activities are used by the two departments as follows:

Assembly Testing

Material handling 200,000 parts 200,000 parts

Supervision of direct labor 40 employees 50 employees

Time spent cleaning 2,000 hours 2,000 hours

Number of machine hours 5,000 machine hours 2,000 machine hours

a. How much of the material handling cost will be allocated to Assembly?

b. What is the ABC allocation rate for supervision of direct labor?

Answer 1

Q. 1

A non routine decision would be making vs. buy decision

Numerical example

Decision: make the component in-house

Quantitative factor to consider would be cost of making vs. cost of buying externally

If cost of making is cheaper it should be made in-house

If cost of buying externally is cheaper it should be purchased externally

Analysis will include relevant cost analysis

Relevant cost of make would be

· Direct material

· Direct labor

· Variable manufacturing overhead

· Fixed manufacturing overhead

· Opportunity cost if any such as rental income

Relevant cost of buying would be

· Unavoidable fixed cost

· Buying cost

Non-financial factors to consider in Make Vs Buy decision

· Supplier reliability

· Quality factors

· Labor issues

· Demand And Supply management

Q 2. Companies which are engaged in mass production and standardised items for sale usually adopt process costing. The products manufactured usually do not have separate identity from one to another unlike job costing. The raw materials usually pass through 2 or more departments until it becomes finished goods.

Examples:

· Oil and gas industry

· Dairy industry

Example of Saudi companies

· Saudi Aramco (oil and gas industry)

· Almarai ( Dairy industry)

The cost per equivalent unit is adopted to calculate the cost of work transferred to finished goods or to next department. The cost per equivalent unit is calculated by computing equivalent units of production for opening stock and closing stock. There are 2 methods one is FIFO and another one is weighted average method.

	FIFO	Weighted
Costs considered	Current period cost is considered	Opening WIP cost plus current period cost
Equivalent units	Units unfinished percentage + units started during the period and completed + closing stock finished percentage	Units completed and transferred plus closing stock finished percentage

Different items of inventory valuation

	FIFO method	Weighted average method
Opening stock	Opening WIP cost + Cost of unfinished work on opening inventory	Equivalent units in closing stock multiplied by equivalent cost per unit
Units completed	Units started and completed during the period multiplied by equivalent cost per unit	Units completed and transferred during the period multiplied by equivalent cost per unit
Closing stock	Units in closing inventory multiplied by cost per equivalent unit	Units in closing inventory multiplied by cost per equivalent unit

Q.No.3