Assignment 2 ACCT 301 Questions

College of Administration and Finance Sciences 2-Accept or reject a customer’s special order. 3- Insource or outsource a business activity. 4-Constrained (scarce) resource allocation issues Examples: I will give examples for the next types of decisions: -Keep or eliminate business segments. Example: ( Insource or outsource business activity). AlFateh company is a manufacturing company that is producing product ( X), the production cost details to produce 30,000 unit per year include the next: Details $ Direct material (unit) 5 Direct Labor (Unit) 3 Variable manufacturing overhead cost (Unit) 1.5 Fixed manufacturing overhead cost (Unit) 1 Fixed selling cost (unit) 0.5 Total 11 The company has an offer to bring this unit from external supplier at $ 9 per unit for 30,000 unit annully. Firstly, we will begin to classify the production costs to ( Relevant or irrelevant ) costs, then we will have the next results: Details $ Relevant Irrelevant Direct material (unit) 5 5 Direct Labor (Unit) 3 3 Variable manufacturing overhead cost (Unit) 1.5 1.5 Fixed manufacturing overhead cost (Unit) 1 - 1 Fixed selling cost (unit) 0.5 - 0.5 Total 11 9.5 1.5 Then through comparing the relevant production cost per unit ( $9.5) versus the outsourcing cost ($ 9) Then the advantage of ( Buy over make) = (9.5 – 9) * 30000 = $ 15,000

College of Administration and Finance Sciences g n department t Total Department costs 96,000 64,000 108,000 48,000 316,000 No of Hours of service 12 15 20 30 No of labor Hours 25 25 60 20 Hence, we can allocate the costs of the supporting centers to the operating departments using the Direct method, and Step-Down method as follows: -Direct Method: Supporting departments Operating Departments Total Material Handling Factory Administratio n dep Assembl y dep Cutting Dep Total Department costs 96,000 64,000 108,000 48,000 316,000 No of Hours of service 12 15 20 30 77 No of labor Hours 25 25 60 20 130 Allocate costs: Material Handling Dep ( 96,000 ) 38,400 (1) 57,600 (2) $ 0 Factory Administration Dep (64,000) 48,000 (3) 16,000 (4) $ 0 Totals 0 0 194,400 121,600 316,000 Share of the Assembly Dep from the Material Handling Dep = 96,000 * (20 /50) = $ 38,400 Share of the Cutting Dep from the Material Handling Dep = 96,000 * (30 /50) = $ 38,400 Share of the Assembly Dep from the Factory Administration Dep = 96,000 * (20 /50) = $ 38,400 Share of the Cutting Dep from the Factory Administration Dep = 96,000 * (30 /50) = $ 38,400 Step-Down method: The basis of the allocation in this method is that the first support department’s costs are allocated to all operating and support departments that use its services. Using the above data the allocation of Costs is done as below:

College of Administration and Finance Sciences X 5,000 SAR 150 Y 3,500 SAR 125 Z 2,200 SAR 100 Using the physical volume method and sales value at the split-off method, allocate the joint costs to each product. (4 Marks) Answer: Through using the above data, we can allocate the joint costs to the three products under the physical volume method and sales value at the split-off method as below: -Physical Volume method: Products Units produced Selling price per Unit Total Sales value at spilit-off Relative Weight Allocation of the Joint costs X 5,000 150 SAR 750,000 46.73% 51,403 Y 3,500 125 SAR 437,500 32.71% 35,981 Z 2,200 100 SAR 220,000 20.56 22,616 10,700 100% 110,000 - Sales value at the split-off method: Products Units produced Selling price per Unit Total Sales value at spilit-off Relative Weight Allocation of the Joint costs X 5,000 150 SAR 750,000 53.29 % 58,619 Y 3,500 125 SAR 437,500 31.08% 34,188 Z 2,200 100 SAR 220,000 15.63% 17,193 10,700 1,407,500 100% 110,000