AIOU Course Code 5410-2 Solved Assignments Spring 2022

ASSIGNMENT No. 2           

Q. 1  The Alpha Manufacturing Company is purchasing a particular material at the cost of Rs. 300 per unit. Monthly usage is 1,500 units. The ordering cost is Rs.50 per order and the annual carrying cost is 16% Presently the procurement of material is based                                     on Economic Order Quantity modeling. A supplier has offered the company for supply of requisite material at 5% discount if the orders in the lots of 3,000 units are placed.

         Required: Evaluate this offer if the company should accept this offer or purchase the materials on Economic Order Quantity basis.

Monthly usage = 1500 * 300 = 450000

Ordering Cost = 1500 * 50 = 75000 + 16% = 87000

Q.2   What are the advantages and disadvantages of FIFO and LIFO costing methods of materials issuance to production?

First-in-first out (FIFO) Method

FIFO method is based on the assumption that materials which are purchased first are issued first. It uses the price of the first batch of materials purchased for all issues until all units from this batch have been issued.

After the first batch if fully issued, the prices of the next batch received becomes the issue price. When this batch is also fully issued, the price of the further next batch issued for pricing and so on. In other words, the materials are issued at the oldest cost price listed in the stores ledger account and thus, the materials in stock are valued at the price of the latest price.

However, an endeavor is made in the method that materials which run the risk of obsolescence are issued first.

Suitability

This method is most suitable in times of falling prices because the issue price of materials to jobs will be ingang wineries cost of replacement of materials will be low. But in case of rising prices, this method is not suitable because the issue price of materials to production will be low while the cost of replacement of materials will be high. This method is useful for materials which are subject to obsolescence and deterioration In periods of rising prices, the FIFO method produces higher profits and results in higher tax liability because lower cost is charged to production Conversely in periods of falling, prices. The FIFO method produces lower profits and results in lower taxes because they are derived from a higher cost of goods sold.

Q.3   The Millat Tractors Company employs ten workers as a group for production of the parts. When the group’s weekly production exceeds the standard number of pieces per hour, each worker in the group is paid a bonus for the excessive production in addition to wages hourly rates. The amount of bonus is computed by first determining the percentage by which the groups’s production exceeds the standard. One half of this percentage is then applied to a wage rate of Rs. 90 to determine an hourly bonus rate. The standard rate of production before a bonus can be earned is 50 pieces per hour for total hour worked. The production record of the group for a week was as under.

         Required:

         Calculate the following:————————————

Q.4   The following data has been extracted from the record of Basharat Production Industries for the year 2014: –

         a) Budgeted factory overheads Rs. 500,000

         b) Actual factory overheads Rs. 455,000

         c) Budgeted machine hours 12,500 hours                                                       

         d) Actual machine hours 12,000 hours

         Required

         1) Work out the following: –                                                                                       

                       a) Predetermined overhead absorption rate per machine hour.

500000 / 12500 = 40 per hour

                       b) Applied overhead cost.

455 000 / 12000 = 37.91 per hour

                       c) Over or under absorbed factory

500000 – 455000 = 45000

         2) Give journal entries for the following: –

         The Petiwal production Company operates with two producing departments, P-I, and

         P-2 and two service department, S-1, and S-2 Actual factory overheads before from the servicing departments are as under: –

         Required

1)          Determine the total overheads cost of the Production Departments after proration of the overhead cost of Servicing Departments using the Step method.

Direct Cost                                         200000            238000            72 000             600000