ACC416 – ASSINGMENT 2

QUESTION 1 – MATERIAL STOCK LEVEL

MeeEnak Sdn Bhd produces “Instant Spicynoodle”. One of the main raw materials for the
product is the special spices that the company imports from Indonesia. The company orders the
spices 8 times a year.

Usage of special spices is on regular basis and on average half of the amount is held in the
inventory. The ordering cost which includes staffing cost incurred by the purchasing department
will amount to RM250 per order. The storage cost is RM5 per kg and insurance expenses
amounting to RM1.50 per kg.

Based on the company’s budget, for every 100 packets of “Instant Spicynoodle”, 0.5 kilograms
of the special spices are required. The planned production for the current year is 400,000 packets
of “Instant Spicynoodle”.

The operation manager has asked the cost accountant to review the current situation and consider
possible ways to save the operation cost to maximize the company’s profit.

Required :
a. Tabulate the relevant annual cost of placing 4, 5,6 and 8 orders per year. Determine the
Economic Order Quantity and the number of orders which should be placed in a year that would
minimize the total cost.

Annual Required Units (RU) = 400 000 packets

Ordering Cost per order (OC) = RM250
Carrying Cost ( Storage cost + Insurance) = RM 5 + RM1.5 = RM6.5
 Order Required Number Of Total Cost Total Cost
Quantity Unit Total Orders Carrying
Order Cost Avg Order qty x
Number of Cost
orders x Number of
RM250 RM6.5

100 000 400 000 4 1 000 325 000 326 000

80 000 400 000 5 1 250 260 000 261 250
66 666.7 400 000 6 1 500 216 666.8 218 166.8
50 000 400 000 8 2 000 162 500 164 500

ECONOMIC ORDERING QUANTITY

2∗𝑅𝑈∗𝑂𝐶
EOQ = ට
𝐻𝐶

EOQ = Economic Order Quantity,

RU = Annual Required Units,
OC = Ordering Cost for one Unit
CC = Carrying Cost ( Storage cost + Insurance )

1) Economic Ordering Quantity

2∗𝑅𝑈∗𝑂𝐶
EOQ ට
𝐶𝐶

2∗400 000∗𝑅𝑀250
ට
𝑅𝑀6.50

EOQ = 5 547 packets

2) Number of Order Per Year
Number of order per year = Annual Required Units / EOQ
Number of order per year = 400 000 / 5547
Number of order per year = 72.1 Orders per year.

3) Ordering Cost
Ordering Cost = Fix ordering cost * Number of order per year
Ordering Cost = RM250 * 8
Ordering Cost = RM2 000

4) Carrying Cost
Carrying Cost = Carrying cost * EOQ/2
Carrying Cost = RM6.5 * 5 547/2
Carrying Cost = RM18 027.8

5) Total Inventory Cost EOQ

Total Inventory Cost = Ordering Cost + Carrying cost
Total Inventory Cost = RM 2 000 + RM 18 0127.8
Total Inventory Cost = RM20 027.8
b. Calculate the Economic Order Quantity using formula.

2∗𝑅𝑈∗𝑂𝐶
EOQ ට
𝐶𝐶

2∗400 000∗𝑅𝑀250
ට
𝑅𝑀6.50

EOQ = 5 547 packets

EOQ = Economic Order Quantity,

RU = Annual Required Units,
OC = Ordering Cost for one Unit
CC = Carrying Cost ( Storage cost + Insurance )

c. Calculate any cost saving between the current policy and the Economic Order Quantity in (a).

Saving Cost :

Existing Cost = Ordering Cost + Carrying Cost

= ( 8 × RM250 ) + (100000/2 × RM6.5)

= ( RM2 000 ) + ( RM325 000)

= RM327 000

Total Inventory Cost EOQ

Total Inventory Cost = Ordering Cost + Carrying cost
Total Inventory Cost = RM 2 000 + RM 18 0127.8
Total Inventory Cost = RM20 027.8
Saving Cost = Existing Cost - Total Inventory Cost

= RM327 000 – RM 20 027.8

= RM306 972.2

d. Explain briefly the following documents :

i) Material requisition notes

A material requisition note or material requisition form is a statement or lists of the items
to be issued / picked from inventory and used in the production process or in the provision of a
service to a customer, usually for a specific job.
The production manager usually fills out the materials requisition form and delivers it to
the materials or storage department where all of the raw materials are stored. Once the materials
manager signs off on the request, the raw materials are moved from storage and placed on the
production floor.
The form usually has three purposes:
 To pick items from stock
 To relieve the inventory records in the amount of the items picked
 To charge the targeted job for the cost of the items requisitioned
The form can also be used as the basis for the reordering of any inventory items that are not
currently in stock.
ii) Purchase order
A purchase order is a document created by a buyer, indicating the items they wish to
purchase from a seller. A purchase order is a contract that forms an agreement between a buyer
and a seller, concerning the goods the buyer wishes to purchase.
Different from an invoice, which is created by the seller and sent to the buyer, a purchase
order originates with the buyer and is sent to the seller.
In addition to information detailing the companies involved, and the date of the order, a
purchase order will contain the important details about the goods the buyer intends to purchase.
These include:
 The name of the product
 The quantity
 The price
 Any additional terms for the sale, such as discounts, etc.
The purchase order is a request for the goods at the quantity and prices listed by the buyer.
QUESTION 2 : OVERHEAD COST
ABCA Bhd manufactures a set of 6 pieces table mats, operates three production departments namely
Cutting, Machining and Assembly and two services departments, Administration and Store. The company
has use the departmental pre-determined overhead absorption rates (OAR) to calculate the selling price of
the product.
Below is the data being used to calculate the pre-determined OAR for each production departments.
Department Value of Production Capacity
Area Direct
Plant Fittings Machine
Occupied Labour Label Cost
(RM) (RM) Hours
(sq.ft.) Hours
Cutting 4,000 12,500 2,000 28,800 40,000 24,000
Machining 8,000 30,000 1,000 25,000 52,000 50,000
Assembly 6,000 3,750 4,000 32,000 76,000 14,000
Administration 1,000 3,750 2,000
Store 1,000 - 1,000

The pre-determined OAR for each department is as follows :

Cutting Department - 70% on direct labour cost
Machining Department - RM1.50 per machine hour
Assembly Department - RM0.80 per direct labour hour

For the ended 31 October 2018, the following overhead cost are incurred :
RM RM
Indirect Material
Cutting 8,800
Machining 6,760
Assembly 8,200
Administration 3,080
Store 1,600 28,440
Indirect wages and supervision
Cutting 5.600
Machining 6.800
Assembly 4,800
Administration 3,800
Store 1,400 22,400
Repair and Maintenance
Cutting 1,960
Machining 5,160
Assembly 580
Administration 240
Store 120 8060
Rental on building 26,400
Depreciation – plant 12,000
Depreciation – fittings 7,300
Utilities 15,000
 Additional Information:
1. Actual direct labour costs and machine hours used for the production departments:
Direct labour costs Machine hours
Cutting RM43,200 (24,000 hours × RM1.80) 22 500
Machining RM30,000 (10,000 hours × RM3) 43 200
Assembly RM60,800 (30,400 hours × RM2) 12 000

2. Service departments are to be apportioned using percentage basis as follows:

Cutting Machining Assembly Administration Store
Administration 20 50 20 - 10
Store 20 60 10 10 -

Required:
a. Prepare an overhead analysis sheet. Use direct distribution method for reapportionment of
services department. All calculations are to be rounded up to the nearest RM.
Overhead Analysis Sheet.
Production centres Service centres
Item of Basis of Total Cutting Machining Assembly Administration Store
expenditure allocation (RM) (RM) (RM) (RM) (RM) (RM)
Indirect 28,440
Direct 8,800 6,760 8,200 3,080 1,600
materials
Indirect 22,400
wages and Direct 5,600 6,800 4,800 3,800 1,400
supervision
Repair and
Direct 8060 1,960 5,160
Maintenance 580 240 120

Rental on
Area 26,400 5,280 10,560 7,920 1,320 1,320
building

Depreciation – Value of
12,000 3,000 7,200 900 900 -
plant plant
Depreciation – Value of
7,300 1,460 730 2,920 1,460 730
fittings fittings

Utilities Area 15,000 3,000 6,000 4,500 750 750

119,600 29,100 43,210 29,820 11,550 5,920

 Cutting Machining Assembly Administration Store
Total
(RM) (RM) (RM) (RM) (RM)
Distribution
from the service
department;

Administration 2,567 6.416 2.567 (11,550)

Store 1.315 3,947 658 5,920

(3,882) (10,363) (3,225)
119,600 32,982 53,573 33,045

Direct machine hour and labour hours 22,500 43,200 12,00

Notes :
Cutting Machining Assembly Administration Store
Administration 20 50 20 - 10
Store 20 60 10 10 -

Administration:
a) Cutting = 20 × 11,550 = 2,567
90

b) Machining = 50 × 11,550 = 6,416

90

c) Assembly = 20 × 11,550 = 2,567

90
Store:
a) Cutting = 20 × 5,920 = 1,315
90

b) Machining = 60 × 5,920 = 3.947

90

c) Assembly = 10 × 5,920 = 658

90
b. Show any over or under absorption of overhead for the year ended 31 October 2018.

There is general acceptance that the time based methods (direct labor hours, machine hours and
to some extent direct labor cost) are more likely to reflect the load on a cost center as production
overheads.

In respect of capital intensive operations or machine related departments, machine hours’ base is
more appropriate since most of the overheads in these departments would be closely related to
machine hours. However, for labor intensive operations direct labor hours base is the most
appropriate method.

In normal costing the absorption overhead will be used in determining the

cost of the product for the year ended 31 October 2018, the actual overhead involved in the
production process will be known. Therefore a comparison must be made between the overhead
absorption by the actual overhead
.
Basis Overhead Actual Over / under absorption
absorption Overhead overhead
Material Cost 11,200 119,600 108,400 under
absorption overhead
Direct Labour 117.800 119,600 1,800 under absorption
Cost overhead
Direct Labour 68.640 119,600 50,960 under absorption
Hour overhead
Material hours 139,200 119,600 19,600 over absorption
overhead

Overhead absorption > Actual Overhead = Over absorption overhead

Overhead absorption < Actual Overhead = Over absorption overhead
c. Explain three (3) reasons of using pre-determined overhead absorption rate to absorb the
overhead.

i) Monitoring Relative Expenses

The beauty of a predetermined overhead rate is that is gives you a percentage to monitor on a
weekly, monthly or quarterly basis, with the amount of expense and base being relative and
proportionate to one another at any given moment in time. You can use production labor as your
base, or choose other bases that are relevant to your business such as production hours,
machining hours or production materials. For example, you can monitor the percentage of labor
benefits, production supplies and utility expense to the amount of labor spent in a given period.

ii) Monitoring the Overhead Rate

A prudent business manager would not wait until the end of the year to calculate their actual
overhead rate. Rates should be calculated on a periodic basis and compared to the predetermined
rate as way to monitor expenses throughout the year in relation to corresponding production
bases. To monitor an overhead rate, actual costs are tabulated at a given time and the actual
overhead rate is calculated in the same fashion as the original budget.

iii) Examining Expenses

If the actual overhead rate exceeds the predetermined rate, it's time to start examining expenses.
The quickest way to review them is to list all expenses in descending dollar value order. Then
research the details of the most expensive items first. Doing this on at least a monthly basis will
give management a good sense of where the most money is being spent and will allow time to
make spending adjustments, as necessary, to keep the actual rate in alignment with the
predetermined rate.
QUESTION 3 : JOB COSTING
Izy Style Company received an order, Job BG; from the Berjaya Group to refurbish its meeting
room which is to be completed in 10 days.

The materials needed for the order are shown bellow:

Fabric Consumption (meter) Cost per meter (RM)
Antique satin 150 50 000
Raw silk 200 60 000
Ribbon lace 100 30 000

Direct labour consists of two skilled workers and three semi-skilled workers. Skilled workers
are paid RM30.00 per day and semi-skilled workers are paid RM20.00 per day.

The company also needs to lease a special sewing machine in order to complete the job. The cost
of leasing the machine is RM50.00 a day. Production overhead cost is 10% of prime cost while
selling distribution cost is 5% of the production cost.

Required:
Calculate the total cost of the job received by Izy Style Company and determine the selling price
for the job if the company decided to have a 40% profit margin.

1) There are three components of job cost: direct materials, direct labour and applied
overhead.

a) Direct Material :
Fabric Consumption (meter) Cost per meter (RM) Total
Antique satin 150 50.00 7,500
Raw silk 200 60.00 12,000
Ribbon lace 100 30.00 3,000
22,500
Direct Material = RM22,500
b) Direct Labour
# Direct labour consists of two skilled workers and three semi-skilled workers. Skilled workers
are paid RM30.00 per day and semi-skilled workers are paid RM20.00 per day.

Direct labour cost

i) Skilled worker = RM30.00 x 10 day = RM300.00
2 skilled worker = 2 x RM300.00 = RM600.00

ii) Semi-skilled worker = RM20.00 x 10 day = RM200.00

3 semi-skilled worker = 3 x RM200.00 = RM600.00

Direct labour cost = RM1,200.00

Prime Cost = Direct Materials + Direct Labour

= RM22,500 + RM1,200
= RM23,700

c) Applied overhead.
The cost of leasing the sewing machine is RM50.00 a day.
RM50.00 x 10 day = RM500
Production overhead cost is 10% of prime cost
= 10% x RM23,700
= RM2,370
Distribution cost is 5% of the production cost.
= 5% x RM2,370
= RM119

Applied overhead = RM500 + RM2,370 + RM119 = RM2,989

Job cost: direct materials, direct labour and production overhead cost.
Direct materials = RM22,500
Direct labour = RM1,200
Applied overhead = RM2,989
Total job cost = RM26,689

2) Determine the selling price for the job if the company decided to have a 40% profit
margin.

Total job cost = RM26,689

Profit margin = 40 %
= 40% x RM26,689
= RM10,676

The selling price = RM26,689 + RM10,676

= RM37,365
 ACC416 – ASSINGMENT 3

Creative Enterprise started business on 1 December 2016. It manufactures only one type of
pockets calculator. The standard cost per unit of calculator is as follow:

RM
Direct labour 4.00
Direct material 9.00
Variable production overhead 2.00
Fixed production overhead 5.00
20.00

Other costs :
Fixed Administrative Expenses RM132,000 per annum
Variable Selling and Distribution Expenses 10% of sales

The fixed production overhead is absorbed based on a budget normal output of 34,800 units per
annum. Total fixed production overhead incurred for the financial year ending 30 November
2018 was RM174,000 and it was incurred evenly during the year.

Detail on production and sales of calculators for the year ended 30 November are as follow:
2017 2018
units units
Production 27,000 31,000
Sales 24,000 30,000

Each unit of calculator can be sold for RM27.00

Required :
a) Prepare the statements of Profit and Loss the year ended 30 November 2018 using:
i) Margin Costing Approach

Number of production 58,000

Number of sales 54,000
Selling price RM27.00 per unit
Direct materials RM9 per unit
Direct labour RM4 per unit
Variable production overheads RM2 per unit
Variable Selling & Distribution Expenses 10% of sales

MARGINAL COSTING
RM RM
Sales revenue at RM27 each 1,458,000
Variable costs
Direct materials 522,000
Direct labour 232,000
Variable production overheads 116,000
Variable Selling & Distribution Expenses 145,800
1,015,800
Contribution per unit 442,200
Fixed costs :
Production overheads 290,000
Administrative Expenses 132,000
422,000
Net Profit 20,200
ii) Absorption Costing Approach

ABSORPTION COSTING
RM RM
Sales revenue at RM27 each 1,458,000
Variable costs
Direct materials 522,000
Direct labour 232,000
Variable production overheads 116,000
Production overheads 290,000

1,160,000
Gross Profit 298,000
Distribution & Administrative costs :
Variable 145,800
Fixed 132,000
277,800
Net Profit 20,200
b) Reconcile the difference in the profit under the two approaches.

When comparison of the results of absorption costing and marginal costing is undertaken, the
adjustment for under absorbed and / or over absorbed overheads becomes necessary. In
absorption costing, on the basis of normal level of activity, the fixed overhead rate is
predetermined. A situation of under‐absorption and/or over‐absorption arises when there is a
difference between actual level of activity and normal level of activity.

When inventory levels increase or decrease during a period then profits differ under absorption
and marginal costing.
 If inventory levels increase, absorption costing gives the higher profit.
This is because fixed overheads held in closing inventory are carried forward (thereby reducing
cost of sales) to the next accounting period instead of being written off in the current accounting
period (as a period cost, as in marginal costing).
 If inventory levels decrease, marginal costing gives the higher profit.
This is because fixed overhead brought forward in opening inventory is released, thereby
increasing cost of sales and reducing profits.
 If inventory levels are constant, both methods give the same profit.
As shown above, the two methods used give the same profit and inventory levels are constant.
c) Explain two differences between Margin Costing and Absorption Costing
.
Differences between Margin Costing and Absorption Costing
Margin Costing Absorption Costing
Main use to help with short-term to calculate profit
decision-making in the forms • to calculate inventory
of valuation for financial
– break-even analysis statements
– margin of safety
– target profit
– contribution sales ratio
– limiting factors
– ‘special order’ pricing
• costs have to be identified as • not as useful in short-term
Limitions either fixed or variable decision-making as marginal
• all overheads have to be costing
recovered, otherwise a loss • may provide less accurate
will be made basis for calculation of
• not acceptable under IAS 2, selling prices where
Inventories overheads are high and
• calculation of selling prices complex in nature
may be less accurate than
other costing methods