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Q1 what are support departments, and why are their costs allocated to other departments?What process is used to allocate support department costs?

Q2 How are joint costs allocated? Explain and analyze using numerical example

.Q 3 How are budget variances calculated and used as performance measures? Provide numerical example?

College of Administrative and Financial Sciences
Assignment 3
Course Name: Cost accounting
Student’s Name:
Course Code: ACCT 301
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Semester: 1
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Academic Year: 1441/1442 H
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Q1 what are support departments, and why are their costs allocated to other departments? What process is used to
allocate support department costs?
Page 1 of 6
(1.5 Marks, week 10 materials)
Answer:The support departments of an organization produce products or provide services to the operating and other support
departments.
The support department costs are common costs that are shared between two or more other departments.
The purposes of assigning support department costs are:•
•
External reporting
Motivation
✓ appropriate consumption of support department resources
✓ efficiency of support department
✓ monitor consumption of support department services
•
Decision making
✓ product pricing
✓ make or buy decisions
If the purpose is to motivate the use of the services of a newly formed department, perhaps no costs should be allocated.
If the purpose is to discourage operating department managers from over-use of the services of support departments,
then a rate per unit of service might be large and not based on actual costs.
If the purpose is to determine the full cost of products or services for long-term pricing decisions, then all support costs
should be allocated.
What process is used to allocate support department costs:1. Clarify allocation purpose
2. Identify cost pools
3. Assign costs to cost pools
4. Choose allocation bases for each cost pool
5. Choose allocation method; allocate support department costs
6. Allocate updated operating department costs to units of goods or services, if relevant
Q2 How are joint costs allocated? Explain and analyze using numerical example.
Page 2 of 6
(1.5 Marks, week 11 materials)
Answer:A process that yields one or more products is called a joint process.
The products are called joint products.
The costs of the process are called joint costs.
Methods of Allocating Joint Costs:Physical output methods, Can be used only when joint products are measured the same way (e.g. pounds or feet).
Sales value at split-off method, often used when all products sold at split-off.
Net realizable value (NRV) method, NRV = Final selling price – Separable costs.
Constant gross margin (GM) NRV method, the two NRV methods can be used when some products are processed past
split-off.
Example: – Company produces three products X, Y and Z. During the year, the joint costs of processing the three
products were $480,000. Production and sales value information were as follows:
Sales Value
Product
Units
at Split-Off
Separable Costs
Selling Price
X
500,000
$13 per unit
$6.00 per unit
$40 per unit
Y
300,000
$12 per unit
$4.00 per unit
$37 per unit
Z
200,000
$8 per unit
$3.00 per unit
$28 per unit
Allocate the joint costs using the physical output method.
Product
X
Y
Z
Units
Relative weight
500,000 500,000/1,000,000
300,000 300,000/1,000,000
200,000 200,000/1,000,000
1,000,000 1,000,000/1,000,000=1
Allocated joint costs
240,000
144,000
96,000
480,000
Allocated joint costs for each product = Relative weight for each product * Joint costs (480,000)
Q 3 How are budget variances calculated and used as performance measures? Provide numerical example?
Page 3 of 6
(2 Marks, week 12 materials)
Answer:Company is preparing a budget for 2021. The budgeted selling price per unit is $10, and total fixed costs for 2021 are
estimated to be $5,000. Variable costs are budgeted at $3/unit. A flexible budget for the volume levels 1,000, 1,100, and
1,200 units.
Sales in units
Revenues
Variable costs
Contribution margin
Fixed costs
Operating income
Volume Levels
1,000
1,100
1,200
$10,000 $11,000 $12,000
$3,000
$3,300
$3,600
$7,000
$7,700
$8,400
$5,000
$5,000
$5,000
$2,000
$2,700
$3,400
Suppose that company 2021 static budget was for 1,100 units of sales. The actual results and the static budget variances
for each row are below:-
Static
Budget
Sales in units
1,100
Revenues
$11,000
Variable costs
$3,300
Contribution margin
$7,700
Fixed costs
$5,000
Operating income
$2,700
Static
Actual
Budget
Results Variance
980
$9,604
$1,396
$2,989
$311
$6,615
$1,085
$4,520
$480
$2,095
$605
Unfavorable
Favorable
Unfavorable
Favorable
Unfavorable
The flexible budget variances for the company:-
Sales in units
Revenues
Variable costs
Contribution margin
Fixed costs
Operating income
Year-end
Flexible
Budget
980
$9,800
$2,940
$6,860
$5,000
$1,860
Actual
Results
980
$9,604
$2,989
$6,615
$4,520
$2,095
Flexible
Budget
Variance
$196
$49
$245
$480
$235
Unfavorable
Unfavorable
Unfavorable
Favorable
Unfavorable
A budget is a way to define areas of responsibility and decision rights, Actual results must be monitored,
Page 4 of 6
measured, and analyzed compared to budgeted plans.
Managers compare actual results to budgeted results in order to:❖ Monitor operations.
❖ Motivate appropriate performance.
Reasons for budget variances are investigated, The investigation may find:❖ Inefficiencies in actual operations that can be corrected.
❖ Efficiencies in actual operations that can be replicated in other areas of the organization.
❖ Uncontrollable outside factors that require changes to the budgeting process.
A static budget variance includes effects from output volume.
A flexible budget variance removes these output volume effects.
Other adjustments to the year-end flexible budget may be made for a fair performance evaluation, such as:❖ Input price changes outside the control of the manager under evaluation.
❖ Fixed cost increases outside the control of the manager under evaluation.
Another example:Suppose the budgeted selling price per unit is SAR 100, and total fixed costs for next year are estimated to be SAR
55,000. Variable costs are budgeted at SAR 40/unit. We will prepare a flexible budget for the volume levels 1,000, 1,100,
and 1,200 units.
Item
Volume Levels
Sales in units
1,000
1,100
1,200
Revenues
100,000
110,000
120,000
(-) Variable Costs
40,000
44,000
48,000
Contribution Margin
60,000
66,000
72,000
(-) Fixed Costs
55,000
55,000
55,000
Operating Income
5,000
11,000
17,000
We will prepare a static budget for the volume level 1,200 units.
Item
Static Budget
Sales in units
1,200
Revenues
120,000
(-) Variable Costs
48,000
Page 5 of 6
Contribution Margin
72,000
(-) Fixed Costs
55,000
Operating Income
17,000
The actual results and the static budget variances for each row are below:Item
Static Budget
Actual Result
Sales in units
1,200
1000
Revenues
120,000
95,000
25,000
(-) Variable Costs
48,000
36,000
12,000
Contribution Margin
72,000
59,000
13,000
(-) Fixed Costs
55,000
50,000
5,000
Operating Income
17,000
9,000
8,000
Variance
The actual results and the flexible budget variances for each row are below:Item
Year and Flexible budget
Actual Result
Sales in units
1,000
1000
Revenues
100,000
95,000
5,000
(-) Variable Costs
40,000
36,000
4,000
Contribution Margin
60,000
59,000
1,000
(-) Fixed Costs
55,000
50,000
5,000
Operating Income
5,000
9,000
4,000
Page 6 of 6
Variance

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