BE310 - Cost Accounting

Arab Open University
BE310 - Cost Accounting
TMA – First Semester 2016 - 2017
Cut-Off Date: 8th December 2016 (Week 11)
About TMA:
The TMA covers the cost accounting concepts and practices in the businesses. It is marked out of 100 and is worth 20% of the overall assessment component. It is intended to assess students’ understanding of some of the learning points within chapters 1 to 5. This TMA requires you to apply the course concepts. The TMA is intended to:
 Assess students’ understanding of key learning points within chapters 1 to 5.
 Increase the students’ knowledge about the reality of the cost and management accounting as a profession.
 Develop students’ communication skills, such as essay writing, analysis and presentation of material.
 Develop the ability to understand and interact with the nature of the managerial accounting tools in reality.

The TMA:
The TMA requires you to:
1- Review various study chapters of ’Cost Accounting’ Book and apply some of the concepts within it.
2- Conduct a simple information search using the internet.
3- Present your findings in not more than 1,200 words (900 words for Part A and 300 words for Part B). The word count excludes headings, references, title page, and diagrams.
4- You should use a Microsoft Office Word and Times New Roman Font of 12 points.
5- You should read and follow the instructions below carefully. Each part of the process will carry marks for the assignment.

Criteria for Grade Distribution:
Criteria Content Referencing Structure and Presentation of ideas Total marks
Part A Part B
Decision making and CVP at Modern Tyres Costing methods at Blue Star Manufacturing
Marks 60 40 (5) (5) 100



Part A
Decision Making & CVP at Modern Tyres

Modern Tyres is a tyre manufacturing company in GCC region. The company has been able to attract good customers’ base through its quality, cost, time and innovation reasons. The company has been able to attract good amount of resources at the lowest possible cost and use them effectively in their manufacturing processes. Cost reduction strategies of this company included reduced amount of wastage, improved operational efficiencies through learning and focus on value adding activities.

It has a manufacturing unit in Dubai and distributes its products to other GCC and Middle Eastern countries. . The company considers its value chain and supply chain activities as its key success factors in addition to innovation they always have. The CEO of the company always reported in all meetings a problem which longer time is taken for making decisions. The CEO of the company requested the managers and accountants to look into this issue and find a solution.

1.1 Value Chain of Modern Tyres

The operational activities of Kuwait Tyres have been summarized as below:


Organization procures materials and manufactures products. Once the products are manufactured, they are checked for its quality and then distributed to the retailers and consumers. Any issues concerning the quality of the products reported by the consumers are directly reported to the retailers and necessary arrangements have been made through retailers to replace the tyres. The CEO of Modern Tyres wants to expand this value chain and consider including research, design, marketing and customer service functions in its value chain.

1.2 Cost Structure & Profitability Estimations of Modern Tyres

Modern Tyres has estimated the following units of sales for the coming month (December 2016). Cost details are also given below:





Information Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5
Units 10,000 20,000 30,000 40,000 50,000
Selling price $ 40 $ 50 $ 40 $ 50 $ 40
Variable Cost per unit $ 20 $ 20 $ 20 $ 20 $ 20
Total Fixed Costs $ 80,000 $ 80,000 $ 80,000 $ 80,000 $ 80,000

1.3 Inventory and Cost Details for October 2016

The company provides some information pertaining to their inventory and other costs as below for October 2016

Inventories Beginning ($) Ending ($) October 2016
Direct Materials 50,000 ?
Work in Process 140,000 ?
Finished Goods 640,000 ?
Cost Details for the month of October 2016
Direct Materials Purchased 480,000
Conversion Costs 1,320,000
Total Manufacturing costs added during the period 1,680,000
Cost of goods manufactured 4 times of direct materials used
Gross Margin percentage 20%
Revenues 2,075,000

1.4 Advertisement Decision

Modern Tyres Company wants to decide whether to go for some more intensive advertisement for one of its products. The information pertaining to this decision is as given below:
Information Without Advertisement With Advertisement
Sales expected 80 units 88 units
Selling price per unit $ 400 $ 400
Variable Cost per unit $ 80 $ 80
Fixed Costs $ 4000 $ 4000 and $ 1000 more due to advertisement

Required

1. Modern Tyres Company is facing decision making problem. The CEO feels that the company takes long time to decide.

(a) In this context, discuss the five step decision making process which can be used by Modern Tyres (15 marks)

(b) Draw a revised value chain model for Modern Tyres including research, design, marketing and customer service functions. (5 marks)
2. Taking information given in 1.2 (cost structure), calculate operating income for the scenarios given (10 marks)

3. Considering information given in Table 1.3 above (inventory & cost details) for October 2016, find the following:

(a) Ending Direct Materials inventory
(b) Ending Work in Process inventory
(c) Ending Finished good inventory (15 marks)

4. Considering information given in 1.4 above, advise the company whether they should go for advertising that product or not? (15 marks)


PART B

Costing Methods followed at Blue Star Manufacturing

Blue Star Manufacturing has four categories of overhead. The four categories and expected overhead costs for each category for next year are as follows:
Costs Amount ($)
Maintenance 500,000
Materials Handling 120,000
Setups 50,000
Inspection 210,000

Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labor hours. One hundred thousand direct labor hours are budgeted for next year.
Estimates for the proposed job are as follows:
Information Values
Direct materials $ 15,000
Direct labor (4,000 hours) $ 12,000
Number of materials moves 50
Number of inspections 60
Number of setups 12
Number of machine hours 2,000

The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers. Expected activity for the four activity-based cost drivers that would be used are as follows:


Machine hours 25,000
Material moves 10,000
Setups 2,500
Quality inspections 6,000
Required:
1. Calculate the amount of overhead that should be allocated to proposed job if Blue Star Manufacturing uses

(a) Direct labour hours as the cost driver (Traditional Costing Method) (10 marks)

(b) Activity Based Costing Method (20 marks)

(2) Explain briefly why over/under absorption of overheads occur? (10 marks)