BE310 - Cost Accounting TMA – Second Semester 2016 - 2017

Arab Open University
BE310 - Cost Accounting
TMA – Second Semester 2016 - 2017
Cut-Off Date: Week 11 (as decided by the Deanship)
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
Cost Accounting & Decision making for Garden Wizard Ltd Costing Methods at Everest Cements
Marks 60 40 (5) (5) 100


Part A

Cost Accounting and Decision Making for Garden Wizard Ltd

Garden Wizard manufactures a variety of garden tools for many markets. It is one of the leading manufacturers of Garden tools in Middle East region. Garden Wizard has a good cost and management accounting systems and talented financial and management accountants working for them. It is evident that managers need to use cost and management accounting information to make decisions related to strategy formulation, budgeting, production planning and pricing.

(1) Supply Chain Management

Garden Wizard always faces decision making situations like whether to enter a new market or now, implement new organizational processes or continue with existing ones, change product designs or to continue with existing designs etc. For all these purposes, company heavily relied upon the cost and management accounting data which is provided by management accounting systems that have established within Garden Wizard. The company had many retail outlets across GCC countries and they take good care of supply chain activities so that products been delivered on time to their customers. Retail outlets also provided good support for achieving excellent in supply chain management of Garden Wizard. The supply chain is working in the following manner for the company:



(2) Cost of goods manufactured and cost of goods sold

Garden Wizard furnishes following information concerning its costs and inventory details for the year 2016 as below:
Information January 2016 ($) December 2016 ($)
Inventories
Materials 10,000 20,000
Work- In- Process 25,000 40,000
Finished Goods 50,000 30,000
Other information for the year 2016
Information For the year 2016 ($)
Materials purchased 50,000
Direct Labour 60,000
Manufacturing Overheads 30,000
Administration & Selling expenses 10,000
Sales 165,000

(3) Estimation on Cost and Sales details of Product A

The company has estimated for product A the cost and sales details for four different situations as given below:

Information Situation 1 Situation 2 Situation 3 Situation 4
Sales units 10 15 25 40
Selling Price per unit $ 400 $ 400 $ 400 $ 400
Variable Cost per unit $ 240 $ 240 $ 240 $ 240
Fixed Costs $ 4,000 $ 4,000 $ 4,000 $ 4,000

The company feels that they need to sell more than 25 units in order to gain profits. Due to the hectic competition available in the market, selling has become tough for the company. As a result, the top management wanted to reduce the selling price of Product A


(4) Decision to Reduce Selling Price of Product A

The Garden Wizard Company is seriously thinking about reducing its price from $ 400 per unit to $ 350 per unit. The details regarding reducing selling price are given as under:

Information Existing situation Proposed Situation (after reducing selling price)
Selling price per unit $ 400 per unit $ 350 per unit
Variable Cost per unit $ 240 per unit $ 240 per unit
Expected no. of units to be sold (Sales units) 160 units 500 units
Fixed Costs ($) $ 4,000 $ 4,000 plus $ 6,000 due to an appointment of new manager

Fixed Costs is expected to increase by $ 3,000 due to additional supervisor salary who will be employed for managing Product A

(5) Cost Details of Product B

Garden Wizards manufactures one more product namely B. Product B is currently sold in the market at a price of $ 66 per unit. The cost details of Product are as given below:

Variable Costs ($) Annual Fixed Costs ($)
Variable manufacturing costs 39 Rent 60,000
Variable non-manufacturing costs 2 Salaries 200,000
Advertising 80,000
Other fixed costs 20,000
Total Variable cost per unit ($) 41 Total fixed costs 360,000

The Garden Wizards Ltd wants to improve its operational efficiency and effectiveness in maximizing customers’ satisfaction. Their strategies include cost leadership, total quality management and better customer services.
Required


(1) Discuss the meaning of supply chain management and value chain analysis and explain how supply chain and value chain analysis would help organizations for achieving competitive advantage over others. (20 marks)

(2) Based on data given in (2),

(i) Calculate cost of goods manufactured and cost of goods sold (10 marks)
(ii) Prepare an Income Statement (5 marks)

(3). Taking information given in 3 (estimations about Product A), calculate operating income for the scenarios given. Is there a BEP in one of the scenarios? If yes, mention which scenario gives BEP for Product A? (10 marks)


(4) Considering information given in 4 above, advise the company whether they should go for reduce the selling price of Product or not? (10 marks)


(5) Based on the information given in 5, (cost details of Product B), calculate the following

(i) BEP in units and in money value ($)
(ii) Sales level (units) required to achieve a target profit of $ 140,000. (5 marks)



PART B

Costing Methods at Everest Cements

Everest Cements manufactures three products M, X and O. The direct costs of three products are shows as below:

Information/Product M N O
Budgeted annual production (units) 30,000 48,000 40,000
Direct Materials $ 70 per unit $ 90 per unit $ 60 per unit
Direct Labour ( $ 20 per hour) $ 80 per unit $ 60 per unit $ 100 per unit


In addition al to the above direct costs, the company incurs annual indirect production cost of $ 2,088,000.

Overheads were allocated to product based on number of direct labour hours





An analysis of overheads shows the following:

Overhead Amount ($) Cost Driver
Material ordering costs 440,000 Number of supplier orders
Machine set up costs 200,000 Number of batches
Machine running costs 800,000 Number of machine hours
General Facility costs 648,000 Number of machine hours
Total overheads 2,088,000

The following additional data relate to each product are as below:

Information/Product M N O
No. of Machine hours 75 125 200
No. of Batches 30 50 20
No. of Supplier orders 120 180 100

Required
(1). Calculate the full cost per unit of each product (M, N and O) using Traditional Costing method (job costing) (10 marks)

(2). Calculate the full cost per unit of each product (M, N and O) using Activity Based Costing method (20 marks)

(3) Explain why the costs reported under traditional costing and activity based costing differ from one another? (10 marks)





END OF TMA QUESTIONS