Fares Company Costing Methods Analysis

The assignment provides an in-depth analysis of the costing methods used by Fares Company, including the plant-wide rate, departmental rate, and activity-based methods. It examines the advantages and disadvantages of each method and identifies areas for improvement to enhance costing accuracy. The analysis also discusses the impact of different costing methods on pricing strategy and customer complaints.

Running head: ACCOUNTING & FINANCE
Accounting & Finance
Name of the Student:
Name of the University:
Author’s Note:

1ACCOUNTING & FINANCE
Table of Contents
Answer to Question A:....................................................................................................................2
Requirement 1:.............................................................................................................................2
Requirement 2:.............................................................................................................................2
Answer to Question B:.....................................................................................................................3
Requirement 1:.............................................................................................................................3
a) Manufacturing Cost under Plant-Wide Rate method:...................................................3
b) Manufacturing Cost under Departmental Rate Method:...............................................3
c) Manufacturing Cost under Activity Based Method:.....................................................3
Requirement 2:.............................................................................................................................5
Answer to Question C:.....................................................................................................................7
Requirement 1:.............................................................................................................................7
Requirement 2:.............................................................................................................................8
Requirement 3:.............................................................................................................................9
Price Charged under Simple Allocation Method:....................................................................9
Price Charged under Departmental Rate Method:...................................................................9
Requirement 4:...........................................................................................................................10
References list:...............................................................................................................................11

2ACCOUNTING & FINANCE
Answer to Question A:
Requirement 1:
Equivalent Units under Weighted Average Method:
Particulars Total Units
% Units % Units
Beginning W-in-P 50000
Transferred in 200000
250000
Completed & Transferred Out 210000 100% 210000 100% 210000
Closing W-in-P 40000 0% 0 40% 16000
Total Equivalent Units 210000 226000
Direct Material Conversion Cost
Equivalent Units
Requirement 2:
Equivalent Units under FIFO Method:
Particulars Total Units
% Units % Units
Completed & Transferred Out 210000
Less: Beginning W-in-P 50000 100% 50000 20% 10000
Started & Completed 160000 100% 160000 100% 160000
Closing W-in-P 40000 0% 0 40% 16000
Total Equivalent Units 210000 186000
Equivalent Units
Direct Material Conversion Cost

3ACCOUNTING & FINANCE
Answer to Question B:
Requirement 1:
a) Manufacturing Cost under Plant-Wide Rate method:
Particulars Units Nos. of Units Cost p.u. Total
Nos. of
Units Cost p.u. Total
Direct Material Cost
Production
Volume 25000 AED 8.00 AED 2,00,000 15000 AED 7.67 AED 1,15,000
Direct Labor Cost
Production
Volume 25000 AED 0.30 AED 7,500 15000 AED 1.60 AED 24,000
Manufacturing Overhead Cost Machine Hour 10000 AED 9.79 AED 97,895 1500 AED 9.79 AED 14,684
Total Manufacturing Cost AED 3,05,395 AED 1,53,684
Manufacturing Cost per unit AED 12.22 AED 10.25
Production Line A Production Line B
b) Manufacturing Cost under Departmental Rate Method:
Particulars Units Nos. of Units Cost p.u. Total
Nos. of
Units Cost p.u. Total
Direct Material Cost
Production
Volume 25000 AED 8.00 AED 2,00,000 15000 AED 7.67 AED 1,15,000
Direct Labor Cost
Production
Volume 25000 AED 0.30 AED 7,500 15000 AED 1.60 AED 24,000
Manufacturing Overhead Cost Machine Hour 10000 AED 7.50 AED 75,000 1500 AED 22.00 AED 33,000
Total Manufacturing Cost AED 2,82,500 AED 1,72,000
Manufacturing Cost per unit AED 11.30 AED 11.47
Production Line A Production Line B
c) Manufacturing Cost under Activity Based Method:
Particulars Units Nos. of Units Cost p.u. Total
Nos. of
Units Cost p.u. Total
Direct Material Cost
Production
Volume 25000 AED 8.00 AED 2,00,000 15000 AED 7.67 AED 1,15,000
Direct Labor Cost
Production
Volume 25000 AED 0.30 AED 7,500 15000 AED 1.60 AED 24,000
Manufacturing Overhead Cost
Production
Volume 25000 AED 3.23 AED 80,737 15000 AED 1.89 AED 28,411
Total Manufacturing Cost AED 2,88,237 AED 1,67,411
Manufacturing Cost per unit AED 11.53 AED 11.16
Production Line A Production Line B

4ACCOUNTING & FINANCE
Workings:
Particulars Production Line A
Production Line
B TOTAL
Direct Material Cost AED 16,00,000 AED 11,50,000 AED 27,50,000
Planned Production Volume 200000 150000
Direct Material Cost per unit AED 8.00 AED 7.67
Direct Labor Cost AED 60,000 AED 2,40,000 AED 3,00,000
Direct Labor Hours 10000 40000 50000
Direct Labor Cost per labor hour AED 6.00 AED 6.00
Direct Labor Hour required p.u. 0.05 0.27
Direct Labor Cost per unit AED 0.30 AED 1.60
Overhead Costs AED 6,00,000 AED 3,30,000 AED 9,30,000
Machine Hours 80000 15000 95000
Overhead Rate per Machine Hour AED 7.50 AED 22.00 AED 9.79
Machine Hour required p.u. 0.40 0.10
Material & Labor Cost per unit:

5ACCOUNTING & FINANCE
Overhead Cost Allocation under ABC Method:
Particulars Total
Production Line
A
Production
Line B
Nos. of Set-Ups 20 15 5
Machine Set-Up Cost AED 80,000 AED 60,000 AED 20,000
Nos. of Production Runs 200 150 50
Production Overhead AED 3,00,000 AED 2,25,000 AED 75,000
Nos. of Inspections 100 60 40
Inspection Cost AED 1,20,000 AED 72,000 AED 48,000
Nos. of Units 350000 200000 150000
Assembly Cost AED 2,75,000 AED 1,57,143 AED 1,17,857
Nos. of Material Moves 200 170 30
Material Handling Cost AED 1,55,000 AED 1,31,750 AED 23,250
Total Overhead Cost AED 9,30,000 AED 6,45,893 AED 2,84,107
Overhead Cost per unit AED 3.23 AED 1.89
Requirement 2:
Gross Profit Percentage under Plant-Wide Method:
Particulars Cost per Unit Total Cost per Unit Total
Expected Sales Volume 20000 10000
Sales Revenue AED 50.00 AED 10,00,000 AED 40.00 AED 4,00,000
Manufacturing Costs AED -12.22 AED -2,44,316 AED -10.25 AED -1,02,456
Gross Profit AED 37.78 AED 7,55,684 AED 29.75 AED 2,97,544
Gross Profit % 75.57% 74.39%
Production Line A Production Line B

6ACCOUNTING & FINANCE
Gross Profit Percentage under Departmental Rate Method:
Particulars Cost per Unit Total Cost per Unit Total
Expected Sales Volume 20000 10000
Sales Revenue AED 50.00 AED 10,00,000 AED 40.00 AED 4,00,000
Manufacturing Costs AED -11.30 AED -2,26,000 AED -11.47 AED -1,14,667
Gross Profit AED 38.70 AED 7,74,000 AED 28.53 AED 2,85,333
Gross Profit % 77.40% 71.33%
Production Line A Production Line B
Gross Profit Percentage under ABC Method:
Particulars Cost per Unit Total Cost per Unit Total
Expected Sales Volume 20000 10000
Sales Revenue AED 50.00 AED 10,00,000 AED 40.00 AED 4,00,000
Manufacturing Costs AED -11.53 AED -2,30,589 AED -11.16 AED -1,11,607
Gross Profit AED 38.47 AED 7,69,411 AED 28.84 AED 2,88,393
Gross Profit % 76.94% 72.10%
Production Line A Production Line B

7ACCOUNTING & FINANCE
Answer to Question C:
Requirement 1:
Particulars Alpha Beta
Production Units 5 10
Labor Hours in Cutting
Department 100 50
Labor Hours in Assembly
Department 100 550
Total Labor Hours 200 600
Plant-Wide Overhead Rate AED 4.50 AED 4.50
Total Manufacturing Overhead AED 900 AED 2,700
Manufacturing Overhead per
unit AED 180.00 AED 270.00
Workings:
Particulars
Cutting
Dept.
Assembly
Dept. Total
Manufacturing Overhead Costs AED 5,00,000 AED 2,20,000 AED 7,20,000
Direct Labor Hours 60000 100000 160000
Overhead Rate per Labor Hour AED 4.50

8ACCOUNTING & FINANCE
Requirement 2:
Particulars Alpha Beta
Production Units 5 10
Labor Hours in Cutting Department 100 50
Machine Hours in Cutting Department 600 50
Total Hours in Cutting Department 700 100
Departmental Rate for Cutting
Department AED 3.13 AED 3.13
Total Overhead for Cutting Department AED 2,188 AED 313
Labor Hours in Assembly Department 100 550
Machine Hours in Assembly Department 50 50
Total Hours in Assembly Department 150 600
Departmental Rate for Assembly
Department AED 1.83 AED 1.83
Total Overhead for Assembly
Department AED 275 AED 1,100
Total Manufacturing Overhead AED 2,463 AED 1,413
Manufacturing Overhead per unit AED 492.50 AED 141.25
Workings:

9ACCOUNTING & FINANCE
Particulars Machine Hour Labor Hours Total
Labor Hours in Cutting Department 100000 60000 160000
Manufacturing Overhead Costs AED 3,12,500 AED 1,87,500 AED 5,00,000
Overhead Cost per hour in Cutting Dept. AED 3.13 AED 3.13 AED 3.13
Labor Hours in Assembly Department 20000 100000 120000
Manufacturing Overhead Costs AED 36,667 AED 1,83,333 AED 2,20,000
Overhead Cost per hour in Cutting Dept. AED 1.83 AED 1.83 AED 1.83
Requirement 3:
Price Charged under Simple Allocation Method:
Particulars Alpha Beta
Direct Material & Labor Cost AED 700.00 AED 700.00
Manufacturing Overhead AED 180.00 AED 270.00
Total Manufacturing Cost AED 880.00 AED 970.00
Add: Profit @10% AED 88.00 AED 97.00
Price Charged to Customers AED 968.00 AED 1,067.00
Price Charged under Departmental Rate Method:
Particulars Alpha Beta
Direct Material & Labor Cost AED 700.00 AED 700.00
Manufacturing Overhead AED 492.50 AED 141.25
Total Manufacturing Cost AED 1,192.50 AED 841.25
Add: Profit @10% AED 119.25 AED 84.13
Price Charged to Customers AED 1,311.75 AED 925.38

10ACCOUNTING & FINANCE
Requirement 4:
The process of costing that is used by Fares Company is inclusive of the departmental
overhead rate and the manufacturing overhead rate. A simple process of allocation is undertaken
with respect to the manufacturing overhead by an organization reliant on direct labor (Costabile
et al., 2017). There are two kinds of products manufactured by Fares Company and they are Beta
and Alpha and the process of costing ascertains the two processes of allocation.
In accordance to the case study of Fares Company, it is observed that making use of
departmental overhead rates provides various advantages as the calculation of the rates would be
in line with the realities of production, less complex and are easier to manage (Novák &
Popesko, 2014).
In accordance to Fares Company, the prices that are charged to the customers based on
the plant wide allocation of Beta and therefore the customers are paying AED 1067 for Beta
product. However, prices are charged for Beta with respect to the departmental overhead, which
came to AED 925.38. Hence, the customers who are paying higher prices for similar products
from Fares Company in would be making complaints. The customers on the other hand who are
purchasing Alpha with respect to the manufacturing overhead will not make any complains. This
is due to the fact that Alpha coming under the departmental overhead is higher. Alpha is levied
AED 968 with respect to plant allocation in comparison to AED 1311.75 with respect to the
departmental overhead rates. Hence, it can be said that Fares is presently the issue of the over
and under costing of the each of the products manufactured because of the several kinds of
costing that have been implemented. Therefore, Fares needs to utilize the costing process that
would support them in incorporating the pricing strategy that is in accordance to their rivals.

11ACCOUNTING & FINANCE
References list:
Bromwich, M., & Scapens, R. W. (2016). Management accounting research: 25 years
on. Management Accounting Research, 31, 1-9.
Costabile, G., Fera, M., Fruggiero, F., Lambiase, A., & Pham, D. (2017). Cost models of additive
manufacturing: A literature review. International Journal of Industrial Engineering
Computations, 8(2), 263-283.
Hopper, T., & Bui, B. (2016). Has management accounting research been critical?. Management
Accounting Research, 31, 10-30.
Hoyle, J. B., Schaefer, T., & Doupnik, T. (2015). Advanced accounting. McGraw Hill.
Maas, K., Schaltegger, S., & Crutzen, N. (2016). Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production, 136,
237-248.
Malmi, T. (2016). Managerialist studies in management accounting: 1990–2014. Management
Accounting Research, 31, 31-44.
Novák, P., & Popesko, B. (2014). Cost variability and cost behaviour in manufacturing
enterprises. Economics & Sociology, 7(4), 89.
Otley, D. (2016). The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, 45-62.
Thomas, D. S., & Gilbert, S. W. (2014). Costs and cost effectiveness of additive
manufacturing. NIST Special Publication, 1176, 12.

12ACCOUNTING & FINANCE
Williams, J. (2014). Financial accounting. McGraw-Hill Higher Education.