two problems in costing

Dr. Mojahid F. Saeed Osman/ISE304.01/Term132/HW5/April 28, 2014

ISE304.01 Principles of Industrial Costing

Term: Second Semester 2013-14 (132)

Homework Assignment 5 Due on Monday May 5, 2014

Submission Instructions:

• Make sure your name is listed on a cover sheet as the first page of the document.

• Each question should be numbered. • Hand written homework will be accepted. However, you will have a credit of 5% of the total

possible points for typing the entire homework in MS word.

Read Chapter 9 in your textbook

1. A firm produces three items (A, B, and C) in two departments, Machining and Assembly. The following table provides production and cost data for the year.

Item A Item B Item C

No. of Units produced 6,000 9,000 10,000

No. of machine hours 2,400 3,600 4,000

Sales 9,000,000SR 15,000,000SR 13,500,000SR

Direct materials costs 3,000,000 4,500,000 3,300,000

Direct labor costs 600,000 900,000 1,800,000

Overhead

Machining 1,800,000

Stamping 1,600,000

Assembly 2,200,000

Total overhead 5,600,000

a) Use the plantwide allocation method to determine the unit cost for each product using number of machine hours as allocation base. (5 points)

b) Assuming that the Machining Department uses machine hours as the allocation base, the Stamping Department uses direct material costs as allocation base, and the Assembly Department uses direct

labor costs as allocation base for overhead assignment. Use the department allocation method to

determine the unit cost for each product. (5 points)

c) If the firm prepared the following information on cost drivers and the estimated volume for each driver.

Activity Overhead Cost driver Cost driver volume

Machining Item A Item B Item C Setting up machines 1,000,000SR Production runs 18 20 25

Operating Machines 800,000 Machine hours 3,000 4,500 5,000

Stamping

Reeling 150,000 No. of reels produced 1,200 1,800 2,000

Stamping 950,000 Machine hours 750 1100 1500

Packing 500,000 No. of units produced 6,000 9,000 10,000

Assembly

Assembly 900,000 No of orders received 180 400 220

Inspection 1,100,000 Labor hours 3,000 4,500 5,000

i. Determine the cost driver rate for each activity cost pool. (5 points) ii. Use the activity-based costing method to determine the unit cost for each product. (10 points)

KING FAHD UNIVERSITY OF PETROLEUM & MINERALS Systems Engineering Department

ISE304.01 Principles of Industrial Costing Second Semester 2013-14 (132)

Dr. Mojahid F. Saeed Osman/ISE304.01/Term132/HW5/April 28, 2014 2

Read Chapter 10. In your textbook

2. A distributor delivers groceries throughout the eastern province. This distributor adds 10% to the order cost to cover the delivery cost. The delivery fee is meant to just cover the cost of delivery. The delivery

service has been analyzed using activity-based costing methods and identified the following four

activities. Data on these activities are:

Activity Cost Driver Cost Cost Driver Volume

Process order Number of orders 500,000SR 8,000 orders

Load truck Number of items 1,000,000 160,000 items

Delivery of merchandise Number of orders 600,000 8,000 orders

Two of its customers are 3M and 4B stores. Below are data on orders and deliveries to these two

customers:

Customer 3D Customer 4B Order value 480,000SR 640,000SR

Number of orders 1000 2000

Number of items 11,000 32,000

(a) What would be the delivery charge for each customer under the current policy of 10% of order

value? (7 points)

(b) What would the activity-based costing system estimate as the cost of delivering to each

customer? (8 points)

(c) You are provided with the following information about resources:

Cost Driver Rate Cost Driver Volume

Resources used

Materials 20SR 30,000 pounds

Energy 100 1,350 machine-hours

Setups 600 300 setups

Purchasing 480 320 purchase orders

Customer service 320 350 returns

Resources supplied

Materials $400,000

Energy 80,000

Setups 100,400

Purchasing 88,000

Customer service 70,200

If the sales for the period totaled 1,200,000, compute the unused resource capacity for each

preceding item. (10 points)

Total Possible Points: 50