Analysis of Costing Systems and Inventory Management Techniques

This document provides a detailed solution to a finance assignment focusing on costing systems and inventory management. The assignment explores two costing methods: traditional costing and activity-based costing, comparing their profitability and suitability. It includes calculations for both methods, demonstrating how costs are allocated and analyzed. Furthermore, the assignment delves into inventory management, specifically addressing the Economic Order Quantity (EOQ) model. It calculates the optimal order quantity, the number of orders per year, and the total costs associated with ordering and carrying inventory. The solution also presents a critical analysis of a proposed Just-In-Time (JIT) inventory strategy, comparing its costs to the EOQ model and justifying a recommendation based on financial considerations. Overall, the document offers a comprehensive understanding of costing and inventory management principles through practical application and analysis.

Questions and answers

Question 2
a.
i. Existing costing system by Senior
Total cost of two projects = Cost of garden A + Cost of garden B
= $201,100 + $326,900
= $ 528,000
Working Note:
Senior categorizes its labor cost into professional and back-office support:
Professional staff cost per hour = $2,000,000 / 3,200 hours = $625 per hour
Back-office staff cost per hour = $800,000 / 5,000 hours = $160 per hour
Total cost of Garden A = (Professional staff cost per hour * professional labor hours for Garden
A) + (Back-office staff cost per hour * Back-office labor hours for Garden A)
= ($625 * 300) + ($160 * 85) = $201,100
Total cost of Garden B = (Professional staff cost per hour * professional labor hours for Garden
B) + (Back-office staff cost per hour * Back-office labor hours for Garden B)
= ($625 * 500) + ($160 * 90) = $326,900
ii. Activity based costing
Total cost of two projects = Cost of planning + Site scope cost + Construction administration
cost
= $8,000 + $78,000 + $60,500
= $146,500
Working note:
Planning cost per meetings = $200,000 / 400 = $500 per meetings

Site scope cost per visit = $600,000 / 1,000 = $600 per visit
Construction administration cost per order = $550,000 / 1000 = $550 per orders
Cost of Planning: $3000 + $5000 = $8000
Garden A = Number of planning meetings * Planning cost per meetings
= 6 * $500 =$3,000
Garden B = 10 * $500 = $5,000
Site scope cost: $6000 + $72,000 = $78,000
Garden A = Number of site visits * Site scope per visit
= 10 * $600 = $6,000
Garden B = 120 * $600 = $72,000
Construction administration cost: $11,000 + $49,500 = $60,500
Garden A = Number of work orders * Construction administration cost per order
= 20 * $550 = $11,000
Garden B = 90 * $550 = $49,500
b. Activity based costing is more profitable than traditional costing system by seniors
c. Activity based costing is more suitable.
Question 4
a.
Optimal order quantity:
EOQ = √ 2 DO
H
= √ 2 ×500,000 × 800
50

= 4,000 units per order
b.
i. Number of orders per year
= Estimated demand for 2020 / Total units per order
= 500,000 / 4,000
= 125 orders in a year
ii. Total cost of ordering and carrying inventory
Ordering cost = 125 orders × $800 per order
= $100,000
Carrying inventory cost = 4000 units × $50 per unit
= $200,000
c. Best alternative
No, not agree with Linda because if company continues with EOQ model, the total annual cost
for acquiring the IC will be:
= Acquiring cost + Ordering cost + Carrying inventory cost
= (500,000 * $200) + $100,000 + $200,000
= $100,300,000
Hence, in case of JIT; BBA has to spent $3,000,000 plus acquiring cost which will be equal to
more than $103,000,000. Therefore, this is the reason behind not agreeing with Linda.