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College of Administration and Finance Sciences
Assignment (1)
Deadline: Saturday 02/03/2024 @ 23:59
Course Name: Cost Accounting
Student’s Name: TAEF ALSHAMMRI
Course Code: ACCT 301
Student’s ID Number: S200315505
Semester: Second
CRN:
Academic Year: 1445 H
For Instructor’s Use only
Instructor’s Name:
Students’ Grade:
/15
Level of Marks: High/Middle/Low
Instructions – PLEASE READ THEM CAREFULLY
• The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
• Assignments submitted through email will not be accepted.
• Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation. This includes filling your information on the cover
page.
• Students must mention question number clearly in their answer.
• Late submission will NOT be accepted.
• Avoid plagiarism, the work should be in your own words, copying from students or
other resources without proper referencing will result in ZERO marks. No exceptions.
• All answers must be typed using Times New Roman (size 12, double-spaced) font.
No pictures containing text will be accepted and will be considered plagiarism.
• Submissions without this cover page will NOT be accepted.
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Assignment Question(s):
(Marks 15)
Q1. Explain the role of accounting information in strategic management. How does accounting
information assist in the formulation and implementation of organizational strategies? Support
your answer by providing an example of one Saudi Company in this regard.
(2 Marks)
(Chapter 1, Week 1)
Answer:
Accounting information plays a crucial role in strategic management by providing valuable insights
and data that assist in the formulation and implementation of organizational strategies. Here’s how
accounting information contributes to strategic management:
1. **Performance Evaluation**: Accounting information helps evaluate the financial performance of
a company by providing metrics such as revenues, expenses, profits, and various financial ratios. This
evaluation aids in identifying strengths and weaknesses within the organization and guides strategic
decisions.
2. **Resource Allocation**: Accurate accounting information enables management to allocate
resources effectively. By analyzing financial data, decision-makers can determine which areas of the
business are performing well and deserve additional investment, while also identifying areas that may
need cost-cutting measures or restructuring.
3. **Budgeting and Forecasting**: Accounting information forms the basis for budgeting and
forecasting activities. It allows management to set realistic financial goals and objectives for the future
and develop strategies to achieve them. Budgeting helps in allocating resources efficiently and
monitoring performance against predefined targets.
4. **Risk Management**: Accounting information assists in identifying and mitigating financial risks.
By analyzing financial statements and performance metrics, management can identify potential risks
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such as cash flow problems, liquidity issues, or excessive debt levels. This awareness enables proactive
risk management strategies to be implemented.
5. **Decision Making**: Strategic decisions, such as pricing strategies, product development
initiatives, or investment decisions, rely heavily on accounting information. Cost data, revenue
forecasts, and profitability analysis help management make informed decisions that align with the
overall strategic objectives of the organization.
Example:
One example of a Saudi company leveraging accounting information in strategic management is Saudi
Aramco, the world’s largest oil company. Saudi Aramco utilizes accounting information in various
ways to drive strategic decision-making:
– Performance Evaluation: Saudi Aramco assesses its financial performance through comprehensive
financial reporting, including income statements, balance sheets, and cash flow statements. By
analyzing these reports, management can evaluate the company’s profitability, liquidity, and overall
financial health.
– Resource Allocation: Accounting information enables Saudi Aramco to allocate resources efficiently
across its various business segments, including exploration, production, refining, and distribution. By
identifying profitable ventures and optimizing costs, the company can maximize returns on investment
and enhance shareholder value.
– Budgeting and Forecasting: Saudi Aramco relies on accounting information to develop annual
budgets and long-term financial forecasts. These forecasts help management anticipate future trends
in oil prices, demand, and production levels, allowing the company to adapt its strategies accordingly.
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– Risk Management: Given the volatile nature of the oil and gas industry, Saudi Aramco pays close
attention to financial risks such as commodity price fluctuations, geopolitical uncertainties, and
regulatory changes. Accounting information enables the company to identify and mitigate these risks
through hedging strategies, contingency planning, and prudent financial management.
– Decision Making: Saudi Aramco uses accounting information to support strategic decision-making
processes, such as capital investments, mergers and acquisitions, and international expansion
initiatives. By conducting thorough financial analysis and scenario planning, management can make
informed decisions that align with the company’s long-term objectives.
In summary, accounting information plays a fundamental role in Saudi Aramco’s strategic
management process, enabling the company to evaluate performance, allocate resources, manage risks,
and make informed decisions in a dynamic and challenging business environment.
Q2. What do you mean by cost function and for what purpose does it serve for? What are the
various methods used to estimate cost functions? Explain each method with suitable numerical
examples.
(3 Marks) (Chapter 2, Week 2)
Answer:
A cost function, also known as a loss function or objective function, is a mathematical function that
measures the “cost” or “error” between predicted values and actual values in a model. Its purpose is to
quantify how well a model is performing by comparing its predictions to the true values in the dataset.
Cost functions are commonly used in various machine learning algorithms for optimization purposes,
such as in regression, classification, and clustering tasks.
The goal in machine learning is to minimize the cost function, i.e., to find the model parameters that
result in the smallest possible error between predicted and actual values. Different methods can be
used to estimate cost functions, depending on the specific problem and the nature of the data. Here are
some common methods along with explanations and numerical examples:
1. **Mean Squared Error (MSE)**:
– The MSE is one of the most widely used cost functions, especially in regression problems.
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– It calculates the average of the squares of the differences between predicted and actual values.
– Formula: ( text{MSE} = frac{1}{n} sum_{i=1}^{n} (y_i – hat{y}_i)^2 ), where (y_i) is the
actual value and ( hat{y}_i ) is the predicted value for the (i^{th}) observation.
– Example: Suppose we have actual values ( y = [2, 4, 6, 8] ) and predicted values ( hat{y} = [3,
3, 7, 9] ).
[ text{MSE} = frac{(2-3)^2 + (4-3)^2 + (6-7)^2 + (8-9)^2}{4} = frac{1 + 1 + 1 + 1}{4} = 1 ]
2. **Mean Absolute Error (MAE)**:
– Similar to MSE, but instead of squaring the differences, it takes the absolute differences.
– Formula: ( text{MAE} = frac{1}{n} sum_{i=1}^{n} |y_i – hat{y}_i| )
– Example: Using the same values as above,
[ text{MAE} = frac{|2-3| + |4-3| + |6-7| + |8-9|}{4} = frac{1 + 1 + 1 + 1}{4} = 1 ]
3. **Cross-Entropy Loss (Log Loss)**:
– Commonly used in classification problems, especially in binary classification.
– Measures the difference between predicted probabilities and actual class labels.
– Formula: ( text{CrossEntropyLoss} = -frac{1}{n} sum_{i=1}^{n} left(y_i log(hat{y}_i) + (1
– y_i) log(1 – hat{y}_i)right) ), where ( hat{y}_i ) is the predicted probability of the positive class
for the (i^{th}) observation.
– Example: Suppose we have actual binary labels ( y = [1, 0, 0, 1] ) and predicted probabilities (
hat{y} = [0.9, 0.2, 0.1, 0.8] ).
[ text{CrossEntropyLoss} = -frac{1}{4} left(1 cdot log(0.9) + (1-0) cdot log(1-0.2) + (1-0)
cdot log(1-0.1) + 1 cdot log(0.8)right) ]
These are just a few examples of cost functions commonly used in machine learning. Depending on
the specific problem and the characteristics of the data, other cost functions may be more suitable.
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Q3. TTL Corporation is in the manufacturer of several plastic products. TTL sells its one of the
plastic product for SAR 500. The variable costs per unit are SAR 200, and the total fixed costs
are SAR 510,000. Based on cost-volume profit analysis, calculate:
(4 Marks)
a) Contribution margin per unit and contribution margin ratio.
b) Break-even point in units and sales SAR.
c) Pretax profit if the company sells 2,200 units.
d) Profit/loss if the company sells 1,500 units.
e) Units needed to reach target pretax profit of SAR 180,000.
f) Sales SAR needed to reach the target pretax profit of SAR 180,000. (Chapter 3, Week 3)
Answer:
Let’s solve each part of the problem step by step:
a) Contribution margin per unit and contribution margin ratio:
Contribution margin per unit = Selling price per unit – Variable cost per unit
Contribution margin per unit = SAR 500 – SAR 200 = SAR 300
Contribution margin ratio = (Contribution margin per unit / Selling price per unit) * 100
Contribution margin ratio = (300 / 500) * 100 = 60%
b) Break-even point in units and sales SAR:
Break-even point (in units) = Total fixed costs / Contribution margin per unit
Break-even point (in units) = SAR 510,000 / SAR 300 = 1,700 units
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Break-even sales (SAR) = Break-even point (in units) * Selling price per unit
Break-even sales (SAR) = 1,700 units * SAR 500 = SAR 850,000
c) Pretax profit if the company sells 2,200 units:
Total contribution margin = Contribution margin per unit * Number of units sold
Total contribution margin = SAR 300 * 2,200 = SAR 660,000
Total costs = Total fixed costs + (Variable cost per unit * Number of units sold)
Total costs = SAR 510,000 + (SAR 200 * 2,200) = SAR 950,000
Pretax profit = Total contribution margin – Total costs
Pretax profit = SAR 660,000 – SAR 950,000 = -SAR 290,000 (Loss)
d) Profit/loss if the company sells 1,500 units:
Total contribution margin = Contribution margin per unit * Number of units sold
Total contribution margin = SAR 300 * 1,500 = SAR 450,000
Total costs = Total fixed costs + (Variable cost per unit * Number of units sold)
Total costs = SAR 510,000 + (SAR 200 * 1,500) = SAR 810,000
Profit/loss = Total contribution margin – Total costs
Profit/loss = SAR 450,000 – SAR 810,000 = -SAR 360,000 (Loss)
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e) Units needed to reach target pretax profit of SAR 180,000:
Target profit = Total contribution margin – Total fixed costs
180,000 = (Contribution margin per unit * Number of units) – 510,000
Number of units = (180,000 + 510,000) / 300
Number of units = 2,300 units
f) Sales SAR needed to reach the target pretax profit of SAR 180,000:
Sales SAR = (Total fixed costs + Target profit) / Contribution margin ratio
Sales SAR = (510,000 + 180,000) / 0.60
Sales SAR = 1,150,000
So, to reach a target pretax profit of SAR 180,000, the company needs to sell 2,300 units or achieve
sales of SAR 1,150,000.
Q4. “Job costing is a method of cost accounting used by companies to find out the cost of specific
jobs or projects.” Comment on this statement and examine how actual allocation rates and
estimated allocation rates are analyzed by the companies? Support your answer with an example
of one Saudi company that use job costing.
(2 Marks) (Chapter 5, week 4 )
Answer:
The statement accurately describes job costing as a method of cost accounting that enables
companies to determine the cost of specific jobs or projects. In job costing, costs are accumulated
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and assigned to individual jobs or projects, allowing companies to track the expenses associated with
each job and calculate its total cost.
Now, let’s delve into how actual allocation rates and estimated allocation rates are analyzed by
companies in the context of job costing:
1. **Actual Allocation Rates**:
– Actual allocation rates refer to the actual overhead costs incurred and allocated to specific jobs or
projects during a particular accounting period.
– Companies analyze actual allocation rates by comparing the actual overhead costs incurred with
the actual level of activity (such as machine hours, labor hours, or units produced) for each job. This
comparison helps in assessing the efficiency of cost allocation and identifying any discrepancies
between estimated and actual costs.
– If there are significant differences between actual and estimated allocation rates, companies may
investigate the reasons behind these variances. For example, if actual overhead costs are higher than
estimated, it could indicate inefficiencies in production processes or unexpected increases in
overhead expenses.
2. **Estimated Allocation Rates**:
– Estimated allocation rates are predetermined rates used to allocate overhead costs to jobs or
projects based on an estimated level of activity (e.g., machine hours, labor hours) for each job.
– Companies analyze estimated allocation rates by comparing the estimated overhead costs with the
estimated level of activity for each job. This comparison helps in setting initial cost estimates for
jobs and determining the allocation of overhead costs before the actual costs are incurred.
– If estimated allocation rates are inaccurate or outdated, companies may need to revise their cost
estimation methods to ensure more accurate job costing in the future.
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Now, let’s consider an example of a Saudi company that utilizes job costing:
**Example: Saudi Binladin Group (SBG)**
Saudi Binladin Group is a prominent construction company in Saudi Arabia known for its
involvement in large-scale construction projects. SBG uses job costing to determine the cost of
specific construction projects. Here’s how SBG might analyze actual and estimated allocation rates:
– **Actual Allocation Rates**: SBG tracks actual overhead costs, such as equipment usage, labor
expenses, and material costs, for each construction project. By comparing these actual costs with the
estimated level of activity (e.g., labor hours, equipment usage) allocated to each project, SBG can
assess the accuracy of its cost estimates and identify any deviations from the budgeted amounts.
– **Estimated Allocation Rates**: Before commencing a construction project, SBG estimates the
overhead costs that will be incurred based on factors such as project size, complexity, and duration.
These estimated overhead costs are then allocated to the project based on predetermined rates for
labor, equipment usage, and other resources. SBG continuously evaluates and adjusts its estimated
allocation rates to ensure that they reflect current market conditions and project requirements
accurately.
In summary, job costing plays a crucial role in helping companies like Saudi Binladin Group
accurately determine the cost of specific projects. By analyzing actual and estimated allocation rates,
companies can refine their cost estimation processes, improve cost control measures, and make
informed decisions to enhance profitability and competitiveness.
Q5. A company uses a process costing system for its sole processing department. There were
4,000 units in beginning WIP inventory for June and 36,000 units were started in June. The
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beginning WIP units were 60% complete and the 3,250 units in ending WIP were 40% complete.
All materials are added at the start of processing.
(4 Marks) (Chapter 6 Part 1, Week 5)
Required:
a) Compute the no. of units started & completed.
b) Compute the EUP for DM and CC using FIFO and WA methods.
Answer:
Sure, let’s break down the required calculations step by step:
a) Compute the number of units started and completed:
– Beginning Work in Process (WIP) units = 4,000 units
– Units started in June = 36,000 units
– Ending WIP units = 3,250 units
To find the number of units completed, we can use the formula:
[ text{Units Completed} = text{Units started} + text{Beginning WIP} – text{Ending WIP} ]
[ text{Units Completed} = 36,000 + 4,000 – 3,250 ]
[ text{Units Completed} = 36,000 + 4,000 – 3,250 ]
[ text{Units Completed} = 36,000 + 4,000 – 3,250 = 36,750 ]
So, the number of units started and completed is 36,750 units.
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b) Compute the Equivalent Units of Production (EUP) for Direct Materials (DM) and Conversion
Costs (CC) using FIFO and Weighted Average (WA) methods:
**FIFO Method**:
– For FIFO, we consider units completed first and then ending WIP.
– DM and CC are added at the start of processing, so we don’t need to consider the percentage of
completion for DM and CC separately.
[ text{EUP for DM (FIFO)} = text{Units Completed} + text{Ending WIP} ]
[ text{EUP for CC (FIFO)} = text{Units Completed} + text{Ending WIP} ]
[ text{EUP for DM (FIFO)} = 36,750 + 3,250 = 40,000 ]
[ text{EUP for CC (FIFO)} = 36,750 + 3,250 = 40,000 ]
**Weighted Average Method (WA)**:
– For WA, we consider the average percentage of completion for both beginning and ending WIP.
[ text{EUP for DM (WA)} = text{Units started} + left(frac{text{Beginning WIP} +
text{Ending WIP}}{2}right) ]
[ text{EUP for CC (WA)} = text{Units started} + left(frac{text{Beginning WIP} + text{Ending
WIP}}{2}right) ]
[ text{EUP for DM (WA)} = 36,000 + left(frac{4,000 + 3,250}{2}right) ]
[ text{EUP for CC (WA)} = 36,000 + left(frac{4,000 + 3,250}{2}right) ]
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[ text{EUP for DM (WA)} = 36,000 + left(frac{7,250}{2}right) = 36,000 + 3,625 = 39,625 ]
[ text{EUP for CC (WA)} = 36,000 + left(frac{7,250}{2}right) = 36,000 + 3,625 = 39,625 ]
So, the Equivalent Units of Production (EUP) for Direct Materials and Conversion Costs using FIFO
method are both 40,000 units, and using Weighted Average (WA) method are both 39,625 units.
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