Method Of Accounting That Helps In Identification †Free Samples

Questions: 1. Activity-based costing(ABC) is acostingmethodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each.Do you think Activity-Based Costing (ABC) has any advantages if so discuss few advantages and also the challenges of this system and how we can resolve it? 2. ALHAMAD Corporation uses process costing. A number of transactions that occurred in December are listed below. Raw materials that cost $38,200 are withdrawn from the storeroom for use in the Mixing Department. All of these raw materials are classified as direct materials.Direct labor costs of $36,500 are incurred, but not yet paid, in the Mixing Department. Manufacturing overhead of $42,100 is applied in the Mixing Department using the department's predetermined overhead rate.Units with a carrying cost of $112,400 finish processing in the Mixing Department and are transferred to the Drying Department for further processing.Units with a carrying cost of $143,800 finish processing in the Drying Department, the final step in the production process, and are transferred to the finished goods warehouse.Finished goods with a carrying cost of $138,500 are sold. 3. Explain why a plant wide overhead allocation system may not be optimal for many companies in today is business environment? 4. Selling price 150 S.R per unit Variable cost 90 S.R per unit Fixed cost 600,000 S.R (TOTAL) What is the beak-even-point? What is the selling price, if break - even point is 12000 units? Answers: Answer 1 Activity -Based-Costing (ABC) is the method of accounting that helps in the identification of the activities of the organization and based on that allocates the overhead expenses to each of its product. A methodology builds a relationship between cost activities and products to increase the accuracy of its production. The benefits of this process of costing are as follows: The ABC stresses on the organizational activities that could benefit most from the process improvement tools like Six Sigma. It improvises the product accuracy by increasing the number of cost pools that are to gather the indirect cost. This methodology uses the cost pools that are more Homogenous than the cost pools in the departments which again helps in enhancing the accuracy of the product The activity costing stresses on the activities of the business to assign the overheads, therefore the sole cause of those costs are measured rather than depending solely on the direct labor hours. There is a better understanding of the individual activities and facilitates comparison. However, this approach of cost accounting has some limitations that can be jotted down as follows: The cost of implanting the ABC system is comparatively higher than its benefits. The various data are needed to be collected and it requires substantial resources to carry on with the process, thus costly to maintain. The approach is used only when the products differ in volume, batch size and in activities. If the situation is different, ABC is not worth the cost. The ABC costing only benefits when the conditions for the same have considerably changed since the existing cost system has established. Only when there is no understanding of the rise in the overhead costs this procedure is beneficial. The cost of maintenance of the activity based costing is worth only when then management does not trust the existing cost system and ignores the informative decision making data. Although, there can be various modifications made in the ABC process in order to overcome the limitations, assuming the system is used only for internal decision making purposes. The two modifications can be made are: The administrative and selling cost should be allocated to its product appropriately. From the product costs, the facility- level cost should be removed. Answer 2 In the books of ALHAMAD Corporation. Journal Date Particulars l.f Amount in $ (Debit) Amount in $ (Credit) December Mixing Department A/cDr To Direct materials A/c (Being raw materials from the storeroom withdrawn use in mixing department) 38200 38200 December Mixing department A/cDr To outstanding cost A/c (Being direct labor cost outstanding in the Mixing Department) 36500 36500 December Manufacturing Expenses A/c Dr To Mixing Department A/c (Being Manufacturing Overhead applied to Mixing Department) 42100 42100 December Drying Department A/c.Dr To Mixing Department A/c (Being units from Mixing Department Transferred to Drying department) 112400 112400 December Finished goods A/cDr To Drying Department A/c (Being Units from drying Department transferred to Finished Goods warehouse) 143800 143800 December Cash A/c..Dr To Sales A/c (Being cash received from sales of finished goods). 138500 138500 Answer 3 The plant wide overhead allocation system is known as the activity based costing. In this methodology, each activity is focused in order to allocate the overhead costs in each of its products. The cost of the process of implementing is costlier compared to the direct method of costing. It requires substantial resources and data are to be collected. This makes the maintenance cost high. Thus, a company may not opt for this procedure. Answer 4 To calculate the breakeven point in unit the formula used is= Fixed cost/Contribution margin, where contribution margin= (selling price per unit-variable cost per unit). According to the problem, Fixed cost= 600000 S.R, Contribution margin =150S.R-90S.R = 60S.R. Therefore, Breakeven Point = 600000/60 = 10000units. Now, in the second case the given breakeven point is 12000units. The variable cost is also the same that is 90 S.R, the selling price = S.P According to the problem, Fixed Cost = 600000 S.R, the contribution = (S.P - 90) Therefore, 12000=600000/ (S.P - 90) Or, (S.P - 90) = 600000/12000 Or, S.P 90 = 50 Or, S.P = 40 The selling price per unit when the beak even unit is 12000 is 40 S.R.