Financial Accounting: Costing Methods, Journal Entries, and Analysis

This assignment solution delves into key financial accounting concepts. It begins by explaining activity-based costing (ABC), highlighting its advantages such as improved accuracy and better understanding of activities, as well as its limitations like high implementation costs. Modifications to ABC for internal decision-making are also discussed. The solution then provides journal entries for ALHAMAD Corporation, covering transactions in the mixing and drying departments. It further addresses the concept of plant-wide overhead allocation and concludes with a breakeven analysis, calculating the breakeven point in units and determining the selling price needed to achieve a specific breakeven point. Desklib offers a wealth of similar solved assignments and study resources for students.

Running head: FINANCIAL ACCOUNTING
Financial Accounting
Name of the Student
Name of the University
Author Note

1FINANCIAL ACCOUNTING
Table of Contents
Answer to Question 1......................................................................................................................2
Answer to Question 2......................................................................................................................3
Answer to Question 3......................................................................................................................4
Answer to Question 4......................................................................................................................4
References........................................................................................................................................4

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Answer to Question 1
Activity -Based-Costing (ABC) is the method of accounting that helps in the identification of
the activities of the organization and based on that allocates the overhead expenses to each of its
product. A methodology builds a relationship between cost activities and products to increase the
accuracy of its production. The benefits of this process of costing are as follows:
 The ABC stresses on the organizational activities that could benefit most from the
process improvement tools like Six Sigma.
 It improvises the product accuracy by increasing the number of cost pools that are to
gather the indirect cost.
 This methodology uses the cost pools that are more Homogenous than the cost pools in
the departments which again helps in enhancing the accuracy of the product
 The activity costing stresses on the activities of the business to assign the overheads,
therefore the sole cause of those costs are measured rather than depending solely on the
direct labor hours.
 There is a better understanding of the individual activities and facilitates comparison.
However, this approach of cost accounting has some limitations that can be jotted down as
follows:
 The cost of implanting the ABC system is comparatively higher than its benefits. The
various data are needed to be collected and it requires substantial resources to carry on
with the process, thus costly to maintain.
 The approach is used only when the products differ in volume, batch size and in
activities. If the situation is different, ABC is not worth the cost.

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 The ABC costing only benefits when the conditions for the same have considerably
changed since the existing cost system has established.
 Only when there is no understanding of the rise in the overhead costs this procedure is
beneficial.
 The cost of maintenance of the activity based costing is worth only when then
management does not trust the existing cost system and ignores the informative decision
making data.
Although, there can be various modifications made in the ABC process in order to
overcome the limitations, assuming the system is used only for internal decision making
purposes. The two modifications can be made are:
1. The administrative and selling cost should be allocated to its product appropriately.
2. From the product costs, the facility- level cost should be removed.
Answer to Question 2
In the books of ALHAMAD Corporation.
Journal
Date Particulars l.f Amount in $
(Debit)
Amount in $
(Credit)
December Mixing Department A/c……Dr
To Direct materials A/c
38200
38200

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(Being raw materials from the storeroom
withdrawn use in mixing department)
December Mixing department A/c…Dr
To outstanding cost A/c
(Being direct labor cost outstanding in the
Mixing Department)
36500
36500
December Manufacturing Expenses A/c …Dr
To Mixing Department A/c
(Being Manufacturing Overhead applied to
Mixing Department)
42100
42100
December Drying Department A/c….Dr
To Mixing Department A/c
(Being units from Mixing Department
Transferred to Drying department)
112400
112400
December Finished goods A/c……Dr
To Drying Department A/c
(Being Units from drying Department
transferred to Finished Goods warehouse)
143800
143800
December Cash A/c…..Dr
To Sales A/c
(Being cash received from sales of finished
goods).
138500 138500

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Answer to Question 3
The plant wide overhead allocation system is known as the activity based costing. In this
methodology, each activity is focused in order to allocate the overhead costs in each of its
products. The cost of the process of implementing is costlier compared to the direct method of
costing. It requires substantial resources and data are to be collected. This makes the
maintenance cost high. Thus, a company may not opt for this procedure.
Answer to Question 4
To calculate the breakeven point in unit the formula used is= Fixed cost/Contribution
margin, where contribution margin= (selling price per unit-variable cost per unit).
According to the problem, Fixed cost= 600000 S.R, Contribution margin =150S.R-90S.R =
60S.R.
Therefore, Breakeven Point = 600000/60 = 10000units.
Now, in the second case the given breakeven point is 12000units.
The variable cost is also the same that is 90 S.R, the selling price = S.P
According to the problem,
Fixed Cost = 600000 S.R, the contribution = (S.P - 90)
Therefore, 12000=600000/ (S.P - 90)
Or, (S.P - 90) = 600000/12000
Or, S.P – 90 = 50

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Or, S.P = 40
The selling price per unit when the beak even unit is 12000 is 40 S.R.

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