Financial Accounting ACC221

 

Course Code:  ACC221                                              Course Title: Financial Control

Course Instructor: Dr. Rupinder                                                      

Academic Task No.:       2                                          Academic Task Title: Financial Accounting

Date of Allotment: 09 April, 2020                          Date of submission: 15 April, 2020

Student’s Roll no:        A07                                         Student’s Reg. no:   

Evaluation Parameters:  Weighted average method, FIFO method, Direct method and Step-Down method,

 

 

Learning Outcomes: (Student to write briefly about learnings obtained from the academic tasks)

 

Declaration:

I declare that this Assignment is my individual work. I have not copied it from any other student’s work or from any other source except where due acknowledgement is made explicitly in the text, nor has any part been written for me by any other person.

Student’s Signature: Rajinder Singh

 

Evaluator’s comments (For Instructor’s use only)

General Observations	Suggestions for Improvement	Best part of assignment

Evaluator’s Signature and Date:

Marks Obtained: _______________                              Max. Marks: ______30________

 

 

 

 

 

Q7: Justice League want to allocate the cost using the process costing, at the beginning the Work in progress is 480 units which are 30 % completed and cost associated with these units were Rs.10,000. During the month the additional 520 units were started and Rs 25000 is spent on it. At the end of the process, 400 units were work in progress and 60 % completed and 100 units were normal loss.

Allocate the cost of using the process costing under the method

1.Weighted Average method

2. FIFO method.

3. discuss the reason of difference between the two methods.

 

Part A:

Brief explanation of the Case: - According to this case, Justice League is a firm which want to allocated their cost by using process costing. Process costing is a continuous process of production of the identical or similar goods. It is a job order costing contract which means that when a company get a contract to perform a particular work of the other. In this case, beginning work in progress is given which was 30% completed and rest 70% is incomplete. The cost which is allocated for the beginning work in progress is Rs. 10000 given.

After this additional units have to started is given with cost spent on it Rs. 25000. In the end of the work in process units are given which was 60% completed. Also, in this case, normal Spoilage of 100 units given which means that expected amount of materials that are rendered unusable as part of the production process.

Calculation or solution of this case: - The items which is already given in this case as below in the table.

Particulars	Units	Conversion Costs
Beginning Work in process (30% Complete)	480	Rs. 10,000
Units Stared	520	Rs. 25000
Spoilage- Normal Loss	100
Ending Work in process (60% complete)	400

 

 

1.)  Weighted Average Method

Particulars	Units	% Completed	Equivalent whole units	Costs Incurred	Cost per Equivalent Units	Allocated Cost
Beginning Work in process	480	30%		Rs. 10,000
Units Stared	520			Rs. 25,000
Units to account for or Total	1000			Rs. 35000
Completed	500	100%	500 eq. units		Rs. 41.66	Rs. 20830
Spoilage - Normal	100	100%	100 eq. units		Rs. 41.66	Rs. 4166
Ending Work in process	400	60%	240 eq. units		Rs. 41.66	Rs. 9998.4
Units to account for or Total	1000		840 eq. units			Rs. 34944 (Approx.)

 

Calculation of Cost per Equivalent Units:

Total Cost = Rs. 10,000 + Rs. 25,000 = Rs. 35,000

Total Equivalent Units Complete = 840 eq. units

Allocated Cost per Equivalent Units = Total Cost / Total Equivalent Units Complete

   = 35,000 / 840

                                                          = Rs. 41.66

Calculation of Equivalent Units:

Spoilage–normal = 100*100% = 100 eq. units.

Ending Work in process = 400*60% = 240 eq. units.

 

2.)  FIFO Method

Particulars	Units	% Completed	Equivalent whole units	Costs Incurred	Cost per Equivalent Units	EU Costs	Add: Beginning	Allocated Cost
Beginning Work in process	480	30%		Rs. 10,000
Units Stared	520			Rs. 25,000
Units to account for or Total	1000			Rs. 35000
Completed	500	480*70% 20*100%	= 336 + 20 = 356 eq. units		Rs. 35.91	Rs. 12783.96	Rs. 10,000	Rs. 26374.96
Spoilage – Normal	100	100%	100 eq. units.		Rs. 35.91	Rs. 3591
Ending Work in process	400	60%	240 eq. units.		Rs. 35.91	Rs. 8618.4		Rs. 8618.4
Units to account for or Total	1000		696 eq. units			Rs. 24993.36 (Approx.)		Rs. 34993.36 (Approx.)

 

Calculation of Equivalent Units:

Spoilage–normal = 100*100% = 100 eq. units.

Ending Work in process = 400*60% = 240 eq. units.

Beginning work in process is 480 units which is 30% complete. So, in case of FIFO method we have to complete first beginning work which is left 70% from the complete of 500 units and left 20 units is completed 100% = 480*70% + 20*100% =336 + 20 = 356 eq. units.

 

Calculation of Cost per Equivalent Units:

Total Cost = Rs. 25,000

Total Equivalent Units Complete = 696 eq. units

Allocated Cost per Equivalent Units = Total Cost / Total Equivalent Units Complete

= 25,000 / 696

                                                         = Rs. 35.91

 

3.)  The difference between FIFO method and weighted average method are:

a.)  Equivalent Units under weighted average method (840 eq. units) is greater than FIFO method (696 eq. units) because there is a beginning work in process inventory.

b.)  If in case no beginning inventory is given then both FIFO method and weighted average method have a same result.

c.)  In FIFO method we work on the oldest inventory first. While in case of weighted average method no such thing is happened. We assume that inventory is completed.

d.)  In weighted average method of inventory valuation follows a system of averaging costs of all the inventory and dispatching them based on a mean cost while In FIFO is an inventory valuation method in which inventory is dispatched on a first-in-first-out basis. So, inventory manufactured first is dispatched first.

e.)  When costs are incurred uniformly during the process, at the beginning of the process, or at some point in the process that the beginning inventory had already reached, equivalent production under weighted average would be greater than FIFO method.

 

Conclusion: Thus, I would like to concluded that during inflation, cost of goods sold increases. FIFO method will report highest net income as cost of goods sold indicate the old prices. Weighted average cost method results in cost of goods sold and inventory which is between the values of FIFO and LIFO method.

Part B: The Avengers Limited is composed of four departments, further distinguished into two services departments(Cafeteria department and Personal department) and two operation department(Metal department and Chrome department) the Avenger limited want to allocate the cost of two service departments to the operation departments and for the allocation of the Cafeteria department the base of labor hours would be considered and for Personal department the square footage will be considered.

	Service		production
	Cafeteria	Personal	Metal	Chrome
Department cost before allocation	400,000	100,000	5,00,000	200,000
Labor hours	10,000	5,000	30,000	10,000
Space in square feet	15,000	1,000	20,000	30,000
Allocate the cost of the service department using the methods 1.    Direct method 2.    Step down method   3.    Which is more effective way to allocate the service department cost

 

Part B:

 

Brief explanation of the case: In this case, Avengers Limited has four departments, which was further divided into two parts service departments and production department. The service department has included Cafeteria and Personal while production department has included Chrome and Metal.

 

Avengers Limited want to allocate the cost of his service department to the production department. These costs are allocating of the Cafeteria department are on the basis of labor hours and Personal department on the square footage. This case is solving in two ways:

1.) Direct Method   2.) Step down method

 

The items which was given in the case as below:

	Service		Production
	Cafeteria	Personal	Metal	Chrome
Department cost before allocation	400,000	100,000	5,00,000	200,000
Labor hours	10,000	5,000	30,000	10,000
Space in square feet	15,000	1,000	20,000	30,000

 

 

 

 

A.)  Direct Method: This method is used to allocate costs to production departments i.e., Metal and Chrome, not to service departments.

 

For Cafeteria department:

 

Total direct labor hours = 30,000 + 10,000 = 40,000

 

1.)  Metal = Direct labor hours / Total labors hours

= 30,000 / 40,000 = 75%

 

2.)  Chrome = Direct labor hours / Total labors hours

= 10,000 / 40,000 = 25%

 

3.)  Cafeteria costs to metal department = 4,00,000*75% = 3,00,000.

 

4.)  Cafeteria costs to Chrome department = 4,00,000*25% = 1,00,000.

 

The mental department is allocated 75% of the cafeteria costs because it accounts for 75% (30,000 of a totals of 40,000) labor hours. After this chrome department is allocated the remaining 20% i.e., 10,000 of a totals of 40,000.

 

For Personal department:

 

Total square footage = 20,000 + 30,000 = 50,000

 

1.)  Metal = Direct square footage / Total square footage

                     = 20,000 / 50,000 = 40%

 

2.)  Chrome = Direct square footage / Total square footage

                         = 30,000 / 50,000 = 60%

 

3.)  Personal costs to metal department = 1,00,000*40% = 40,000.

 

4.)  Personal costs to Chrome department = 1,00,000*60% = 60,000.

 

Similarly, the metal department has 40% of the total square footage, so it is assigned 40% of the personal services cost and the chrome department is assigned the remaining 60%.

 

 

 

 

 

B.) Step-down method: In this method, Services cost is allocating to both Service department and Production department. It does this by sequentially allocating service department costs, starting with the department that provides the most services to other service departments, and finishing with the department that provides the least services to other service departments.

 

Particulars	Service		Production
	Cafeteria	Personal	Metal	Chrome
Department Costs before allocation	4,00,000	1,00,000	5,00,000	2,00,000
First Step	(4,00,000)	44,444.4	2,66,666.6	88,888.8
Subtotal	0	1,44,444.4	7,66,666.6	2,88,888.8
Second Step	0	(144,444.4)	57,777.76	86,666.64
Total	0	0	8,24,444.36	3,75,555.44

 

Calculation of Costs allocation:

 

Cafeteria costs is allocating in Personal department, Metal and chrome on the basis of labor hours.

 

Personal department: 4,00,000 * 5,000 / 5,000 + 30,000 + 10,000

= 44,444.4

Metal department: 4,00,000 * 30,000 / 5,000 + 30,000 + 10,000

= 2,66,666.6

Chrome department: 4,00,000 * 10,000 / 5,000 + 30,000 + 10,000

= 88,888.8

 

Personal department is allocating in Metal and chrome on the basis of Square feet.

 

Metal department: 1,44,444.4 * 20,000 / 20,000 + 30,000

= 57777.76

Chrome department: 1,44,444.4 * 30,000 / 20,000 + 30,000

= 86,666.64

 

C,) The more effective way to allocate the service department cost is the cost allocations only in the production departments of an Avengers Limited. These production departments perform the primary purpose of the company—to produce goods and services for consumers.

There are three methods for allocating service department costs:

The first method, the direct method, is the simplest of the three. The direct method allocates costs of each of the service departments to each operating department based on each department’s share of the allocation base. Services used by other service departments are ignored.

The second method of allocating service department costs is the step-down method. This method allocates service costs to the operating departments and other service departments in a sequential process. The sequence of allocation generally starts with the service department that has incurred the greatest costs. After this department’s costs have been allocated, the service department with the next
highest costs have its costs allocated, and so forth until the service department with the lowest costs has had its costs allocated. Costs are not allocated back to a department that has already had all of its costs allocated.

The third method is the most complicated but also the most accurate.  The reciprocal method allocates services department costs to operating departments and other service departments.  Under the reciprocal cost, the relationship between service departments is recognized and cost is allocated to and from each service department for services provided.