Assignment on

BBA323 Cost Accounting

Topic: “Importance of Cost Accounting”

Submitted To
Imran Khan
Lecturer
Department of Business Administration
Hamdard University Bangladesh

Submitted By
Sahriar Emon
ID: 221173007
Program: BBA (Accounting)
Batch: 13th

Semester: 8 th

Department of Business Administration

Hamdard University Bangladesh

Date of Submission: 31/07/2021

HAMDARD UNIVERSITY BANGLADESH

Question-01
A. Differentiate between Throughput accounting and back flush accounting.
Answer:
Throughput accounting (TA) is a principle-based and simplified management accounting approach
that provides managers with decision support information for enterprise profitability improvement.
Throughput Accounting is a management accounting technique used as the performance measure
in the Theory of Constraints (TOC).
Back flush costing is a product costing system generally used in a just-in-time (JIT) inventory
system. In short, it is an accounting method that records the costs associated with producing a good
or service only after they are produced, completed, or sold.
B. Distinguish between Mix Variance and Yield Variance.
Answer:
The material mix variance measures the impact of the deviation from the standard mix on material
costs, while the material yield variance reflects the impact on material costs of the deviation from
the standard input material allowed for actual production.
Direct material mix variance is the difference between the budgeted and actual mixes of direct
material costs used in a production process. This variance isolates the aggregate unit cost of each
item, excluding all other variables. The formula is: Standard cost of actual mix - Standard cost of
standard mix.
Yield variance is the difference between the amount of finished product expected from a given
amount of raw materials, and the amount of finished product actually produced. The concept is
used to measure the effectiveness of a production process in creating finished products.
C. What are the main uses of forecasts based on the statement of financial position?
Answer:
The statement of financial position or balance sheet is an essential tool used of forecasts based by
executives, investors, analysts, and regulators to understand the current financial health of a
business. It is generally used alongside the two other types of financial statements:
✓ The income statement and
✓ The cash flow statement.
E. State the three-step method of decision tree analysis.
Answer:
Decision tree analysis is a powerful decision-making tool which initiates a structured
nonparametric approach for problem-solving. It facilitates the evaluation and comparison of the
various options and their results, as shown in a decision tree. It helps to choose the most
competitive alternative.
✓ The first step understands and specifying the problem area for which decision making is
required.
✓ The second step is interpreting and chalking out all possible solutions to the particular issue
as well as their consequences.
✓ The third step is presenting the variables on a decision tree along with its respective
probability values.
F. State the attitude to risk of a manager that is risk averse.
Answer:
One way in which managers reduce their risk taking, according to the researchers, is through
diversifying acquisitions that is, acquisitions of firms that are in industries different from the
acquiring firm’s industry. In addition to seeking out new industries, risk adverse managers (for
example, younger managers afraid to risk their future careers) will seek out target firms that will
likely reduce stock volatility and distress. In addition, these acquisitions will be financed by equity
rather than cash, further reducing the risk of distress.
G. What is the difference between trade credit and consumer credit?
Answer:
Trade Credit: Trade credit is a business-to-business (B2B) agreement in which a customer can
purchase goods without paying cash up front, and paying the supplier at a later scheduled date.
Usually, businesses that operate with trade credits will give buyers 30, 60, or 90 days to pay, with
the transaction recorded through an invoice.
✓ Trade credit is a type of commercial financing in which a customer is allowed to purchase
goods or services and pay the supplier at a later scheduled date.
✓ Trade credit can be a good way for businesses to free up cash flow and finance short-term
growth.
✓ Trade credit can create complexity for financial accounting depending on the accounting
method used.
✓ Trade credit financing is usually encouraged globally by regulators and can create
opportunities for new financial technology solutions.
✓ Suppliers are usually at a disadvantage with a trade credit as they have sold goods but not
received payment.
Consumer Credit:
Consumer credit is personal debt taken on to purchase goods and services. A credit card is one
form of consumer credit.
✓ Installment credit is used for a specific purpose and is issued for a set period of time.
✓ Revolving credit is an open-ended loan that may be used for any purchase.
 ✓ The disadvantage of revolving credit is the cost to those who fail to pay off their entire
balances every month and continue to accrue additional interest charges.
H. List three reasons for holding cash.
Answer:
Motives for Holding Money In his publication on The General Theory of Employment, Interest,
& Money, Keynes outlined three reasons, or motives, for holding money or cash:
✓ Transaction Motive: to pay for goods or services. It is useful for conducting everyday
transactions or purchases.
✓ Precautionary Motive: it's a relatively safe investment. Cash investments rarely lose value
(as can stocks or bonds) and are therefore held for safety reasons in a balanced portfolio.
✓ Asset or Speculative Motive: it can provide a return to their holders. There can be many
variations on the reasons mentioned above, but these three reasons are perhaps the best
overall explanation as to why cash plays an important role in any investor's portfolio.
I. What is just-in-time (JIT) system? List out its main benefits.
Answer:
The just-in-time (JIT) inventory system is a management strategy that aligns raw material orders
from suppliers directly with production schedules. JIT production aims to produce the right parts
or finished goods at the right time only when they are needed. A JIT production system is a pull
system where parts or goods move through the production system based on demand.
J. What type of costs should not be assigned to products in an Activity-Based Costing
System?
Answer:
The cost of organization sustaining and the idle time costs should not be assigned to the costs of
product under the activity-based costing system.
K. State in short, the reasons for the use of predetermined rates for factory overheads
absorption.
Answer:
The companies use predetermined overhead rates for the factory overheads absorption rather than
actual manufacturing overhead costs to apply overhead to jobs because the management requires
the overhead rate before year end and the predetermined rates for factory overheads absorptions
are helpful in record keeping as well. The actual overhead rate does not take into account all the
abnormal factors while the predetermined overhead rates include all the abnormal factors related
to a particular job.
 L. Define days sales outstanding (DSO). What can be learned from it?
Answer:
Day’s sales outstanding (DSO) is a measure of the average number of days that it takes a company
to collect payment after a sale has been made. Main learning from it that, Day’s sales outstanding
is an element of the cash conversion cycle and is often referred to as day’s receivables or average
collection period.
M. State how the information obtained from the activity-based costing system could be
used for cost management purposes.
Answer: Activity-based costing provides more accurate information because we can identify
which activities cause costs, and we can determine the cost of the activity. Activity-based costing
identifies and measures the costs of performing the activities that go into a product much better
than traditional cost methods. The company can try to reduce the number of cost drivers for each
product through process or product redesign. The cost driver rate can also be used as a measure of
cost efficiency.
N. Compare and contrast the economic order quantity (EOQ) model and a just-in-time
(JIT) approach to inventory management.
Answer:
EOQ maintains a fixed amount of material in its inventory and has a reorder level wherein it
must be replenished to avoid shortages and extra costs while JIT focuses on meeting customers'
demands on time with the right quality and quantity with minimum resource, time, and material
wastes.
O. State the meaning of the following terms: (i) Opportunity cost; (ii) Limiting factor.
Answer:
I. Opportunity cost: Opportunity cost represent the potential benefits an individual, investor,
or business misses out on when choosing one alternative over another.
II. Limiting factor: A limiting factor is a variable of a system that causes a noticeable change
in output or another measure of a type of system. The limiting factor is in a pyramid shape
of organisms going up from the producers to consumers and so on. A factor not limiting
over a certain domain of starting conditions may yet be limiting over another domain of
starting conditions, including that of the factor.
Question-02
A. SMART BACKPACK Co. (SBC) was established in 2015 and manufactures a range of
Travel backpack and Laptop backpack which it makes from cloths purchased from a
number of suppliers. The recently appointed Managing Director has expressed increasing
concern about the trends in falling sales volumes, rising costs and hence declining profits
over the last two years. There is general agreement amongst the managers of SBC that
these trends are the result of the increased intense competition that has emerged over the
last two years. SBC continues to have a reputation for high quality but this quality is now
being matched by the competition. The competitors are taking SBC’s share of the market
by selling equivalent products at lower prices. It is thought that in order to offer such low
prices the production costs of the competitors must be lower than SBC’s.
Required: Discuss how SBC could improve its sales volumes, costs and profits by using
I. Value analysis and
II. Functional cost analysis.

Answer:
i. Value analysis: Value Analysis is a systematic interdisciplinary examination of the
factors which affect the cost of a product in order to determine the means of achieving
the specified purpose in the most economical manner while meeting the required level
of quality and reliability. Value Analysis may therefore be viewed as a cost reduction
and problem-solving technique that analyses an existing product in order to identify
and reduce or eliminate any costs which do not contribute to value or performance.
ii. Functional cost analysis: Functional Cost Analysis is a method that can be applied to
examine the component costs of a product or service in relation to the value as
perceived by the customer. Functional Cost Analysis can be applied to new products
and breaks the product down into its component parts. For example, a garden table may
have the function to fold completely flat and therefore require much less storage space.
The outcome of the analysis is to improve the value of the product while maintaining
costs and or reduce the costs of the product without reducing value. In contrast,
Functional Cost Analysis focuses on the value to the customer of each function of the
product and consequently allocates resources to those functions from which the
customer gains the most value.
It is clear from the scenario that SBC needs to be able to reduce its selling prices in order to
compete in the market. This selling price reduction can only be sustained by a reduction in SBC’s
unit costs; however, such a reduction must not be achieved by compromising on quality.
Both value analysis and functional cost analysis have potential to help SBC but value analysis is
likely to be a more useful technique because garden tables and chairs are products that are sold
more on the basis of their use value rather than their esteem value.
 B. SSS Sound Systems Limited begins each week with 450 phases in stock. This stock is
depleted each weekandreordered.IfthecarryingcostperphaserisTk.37peryearandthefixed
order cost is Tk. 125. Required:
I. What is the total carrying cost?
II. What is the restocking cost?
III. Should SSS increase or decrease its order size? Describe an optimal inventory
policy for SSS in terms of order size and order frequency.

i. The carrying costs are the average inventory times the cost of carrying an individual
unit, so: Carrying costs = (450/2) (Tk. 37) = Tk. 8,325
ii. The order costs are the number of orders times the cost of an order, so: Restocking
costs = 52(Tk. 125) = Tk. 6,500
iii. The economic order quantity (EOQ) is: EOQ = [(2T × F)/CC]1/2 EOQ = [2(52)
(450) (Tk. 125)/Tk. 37]1/2 EOQ = 397.63 The number of orders per year will be
the total units sold per year divided by the EOQ, so: Number of orders per year =
52(450)/397.63 Number of orders per year = 58.85 The firm’s policy is not optimal,
since the carrying costs and the order costs are not equal. The company should
decrease the order size and increase the number of orders.

The number of orders per year will be the total units sold per year divided by the EOQ, so:
Number of orders per year = 52(450)/397.63
Number of orders per year = 58.85
The firm’s policy is not optimal, since the carrying costs and the order costs are not equal. The
company should decrease the order size and increase the number of orders.
Question-03
Suppose you are a management accountant. In a recent training, you came to know that ABC
method is a very effective technique in overhead allocation. Prepare a brief report to the managing
director which explains why ABC costing is an important management accounting tool instead of
traditional.
Answer:
To: Managing Director
From: Management Accountant
Date: 30 July 2021
Subject: ABC costing is an important management accounting tool instead of traditional.
Activity-Based Costing (ABC)
Activity-Based Costing (ABC) is an Information System developed in the 1980s to overcome some
of the limitations of traditional cost accounting and to enhance its usefulness to strategic decision-
making.
Nowadays managers are facing global competition and increased productivity in new
manufacturing environments. Companies attempt to become customer focused and concentrate on
quality products at competitive prices. Under these circumstances, many firms are interested in
determining various costs more accurately with the objective to integrate manufacturing and
marketing strategies. Various costing systems are used to provide an increased accuracy about
product costs, product mix, and pricing and other investment decision- makings. Some experiences
reveal that the distortion in reported product costs and, in turn, product pricing could be reduced
by using activity-based costing (ABC).
So, to break it down the advantages and disadvantages of ABC are;
The main advantages:
➢ Assesses costs of individual activities, based on their use of resources
➢ Enables accurate costing of all activities to be obtained throughout an organization.
➢ Easy to identify where high (and low) costs are being incurred and the cause.
➢ A valuable tool for both business and process improvement
➢ Helps with future product planning e.g. the cost of all activities associated with a product
or service can be accurately determined before it is launched. This can then help with
determining pricing, and any associated expenditure.
Disadvantages include:
➢ It may be difficult to set up and establish, particularly if an organization is using more
traditional accounting methodologies. (Barriers to change).
➢ Can be time consuming if all activities are to be coasted.
➢ May provide too much detail - obscuring the bigger picture.
➢ Can lead to employee and possible management disharmony.

Traditional costing
Currently, we adopt the more traditional way of apportioning our production overheads which
involves the overhead rate being calculated using direct labor hours, machine hours, or units, in
our case using direct labor hours costs.
The advantages of using this system are:
Simplicity - the calculation of overhead rates is relatively straightforward;
➢ They are widely understood in business;
➢ They are not expensive to operate;
➢ Until the late 1980s they were seen as fairly accurate;
➢ They are still being used after many decades. The weaknesses of traditional costing systems
are:
➢ Their reliance on arbitrary rather than cause-and-effect allocation of overheads;
➢ Their inability to give accurate product costs in multiproduct companies;
➢ Their failure to analyze non-manufacturing costs

If we want to know the true cost to produce specific products for specific customers, the traditional
method of cost accounting is inadequate. ABC was developed to overcome the shortcomings of
the traditional method. Instead of just one costing such as labor hours, ABC will use many costings
to allocate our indirect costs. A few of the costing’s that would be used under ABC include the
number of machine setups, the pounds of material purchased or used, the number of engineering
change orders, the number of machine hours, and so on.
Finally, I can say that the ABC enables effective challenge of operating costs to find better ways
of allocating and eliminating overheads. It also enables improved product and customer
profitability analysis. It supports performance management techniques such as continuous
improvement and scorecards. That's why the management can be following the ABC costing