Planning and budgetingLecture 27Chapter 13 Modified.docx

Planning and budgeting
Lecture 27
Chapter 13
* Modified from PPT slides of McGraw-Hill/Irwin
Overview:
1. Estimate sales.
2. Develop production and cost budgets.
3. Estimate cash flows.
Budgets
Financial plan of the resources needed
to carry out activities and meet financial
goals
Budget
Goals
Plans

Decision making
Performance evaluations
Organizational Plan
Financial plan of an organization for the
coming year or other planning period
Company’s broad objectives established by
management that employees work to achieve
Statement detailing steps to take to achieve a
company’s organization goals
Master Budget
Organization Goals
Strategic Long-Range Plan
Organization Individual
Organization
goals
Individual goals
and values

Sales Budget
Sales is the most difficult aspect of budgeting.
Sales Staff
Forecasting
Trend Analysis
Market Research
Example: Sales Budget (Santiago Pants)
Estimated sales = Estimated
number of units
x Budgeted
price per
unit
$7,200,000 = 160,000 x $45
Production Budget
Production plan of resources needed to meet

current sales demand and ensure that
inventory levels are sufficient for future sales
Units in
beginning
inventory
(BB)
Required
production
(units)
(TI)
Budgeted sales
(units)
(TO)
Units in ending
inventory
(EB)
=+ -
Inventories

BB TI TO EB
Production Budget, Continued. . .
Units in
beginning
inventory
(BB)
Required
production
(units)
(TI)
Budgeted
sales (units)
(TO)
Units in
ending
inventory
(EB)

-= +
5,000 units
(beginning
Inventory)
Required
production
(units)
160,000 units
(sales)
15,000 units
(ending
inventory)
-= +
BBTI TO EB
BB TI TO EB
Required
production
(units)

170,000 units=
Production Budget, Continued. . .
Expected sales 160,000
Add desired ending inventory of finished goods 15,000
Total needs 175,000
Less beginning inventory of finished goods 5,000
Units to be produced 170,000
Santiago Pants
Production Budget (in units)
For the Budget Year Ended December 31
Production Costs
Direct
Labor
Direct
Materials
Production
Overhead

Example: Direct Materials
Cotton Fine Cotton
Material per unit of output 3.0 yards 0.2 yards
Beginning materials inventory 10,000 yards 1,000 yards
Ending inventory 15,000 yards 1,000 yards
Cost per yard 3$ 5$
Santiago Pants
Material Data
Estimated Production
Example: Direct Materials, Continued. . .
Yards needed
Fine cotton = 170,000 x 0.2 + 1,000 - 1,000
= 34,000 yards
= 515,000 yards
Cotton = 170,000 x 3.0 + 15,000 - 10,000
Santiago Pants

Material Data
Estimated Production
Example: Direct Materials, Continued. . .
Cotton Fine Cotton
Direct materials needed per unit 3.0 yards 0.2 yards
Total production needsa 510,000 a 34,000 b
Add desired ending inventory 15,000 1,000
Total direct materials needs 525,000 35,000
Less beginning inventory of materials 10,000 1,000
Total yards to be purchased 515,000 34,000
Cost of materials, per yard $3 $5
Cost of direct materials to be purchased $1,545,000 $170,000
Total cost of direct materials ($1,545,000 + $170,000)
1,715,000$
Santiago Pants
Direct Materials Budget
a 3.0 yards x 170,000 units

b 0.2 yards x 170,000 units
Example: Direct Labor
Units to be produced 170,000
Direct labor time per unit (in hours) 0.50
Total direct labor-hours needed 85,000
Direct labor cost per hour 22$
Total direct labor cost 1,870,000$
Santiago Pants
Direct Labor Budget
Example: Overhead
Variable overhead needed to produce 170,000 units
Indirect materials and supplies ($0.30 per unit) 51,000
Materials handing ($0.40 per unit) 68,000
Other indirect labor ($0.10 per unit) 17,000 136,000$
Fixed manufacturing overhead

Supervisory labor 102,000
Maintenance and repairs 50,000
Plant administration 85,000
Utilities 55,000
Depreciation 140,000
Insurance 30,000
Property taxes 60,000
Other indirect labor 22,000 544,000
Total manufacturing overhead 680,000$
Santiago Pants
Overhead Budget
Example: Cost of Goods Sold
Beginning work in process inventory
Manufacturing costs
Direct materials
Beginning inventory (10,000 cotton @ $3 + 1,000 fine cotton @
$5) 35,000$

Purchases 1,715,000
Materials available for manufacturing 1,750,000$
Less ending inventory (15,000 cotton @ $3 + 1,000 fine cotton
@ $5) (50,000)
Total direct material costs 1,700,000$
Direct labor 1,870,000
Manufacturing overhead 680,000
Total manufacturing costs 4,250,000$
Less ending work in process inventory -0-
Cost of goods manufactured 4,250,000$
Add beginning finished goods inventory (5,000 units)a 125,000
Less ending finished goods inventory (@ 15,000 units)b
(375,000)
Cost of goods sold 3,990,000$
a Management estimate
b Finished goods are valued at $25 per unit ($4,250,000/170,000
units produced).
Hence, ending finished goods inventory is estimated to be
$375,000 (15,000 units x $25).
Santiago Pants
Budgeted Statement of Cost of Goods Sold

Example: Marketing and Administrative Budget
Variable marketing costs
Sales commissions ($1.50 per unit) 240,000$
Other marketing ($0.75 per unit) 120,000
Total variable marketing costs 360,000$
Fixed marketing costs
Sales salaries 130,000$
Advertising 153,000
Other marketing 67,000
Total fixed marketing costs 350,000
Total marketing costs 710,000$
Administrative costs (all fixed)
Administrative salaries 241,000$
Legal and accounting staff 136,000
Data processing services 127,000
Outside professional services 32,000

Depreciation: building, furniture, and equipment 84,000
Other, including interest 36,000
Taxes-other than income 140,000
Total administrative costs 796,000
Total budgeted marketing and administrative costs 1,506,000$
Santiago Pants
Schedule of Budgeted Marketing and Administrative Costs
Example: Income Statement
Budgeted revenues
Sales (160,000 units at $45) 7,200,000$
Costs
Cost of goods sold 3,990,000$
Marketing and administrative costs 1,506,000
Total budgeted costs 5,496,000
Operating profit 1,699,000$
Federal and other income taxesa 550,000
Operating profit after taxes 1,149,000$

a Computed by the compay's tax staff
Santiago Pants
Budgeted Income Statement
Cash Budget
Statement of cash on hand at the start of the budget period,
expected cash receipts, expected cash disbursements, and
the resulting cash balance at the end of the budget period.
Collections of accounts receivable
Cash sales
Sales of assets
Borrowing
Issuing stock
Other
HC has just made it sales forecasts and its marketing
department estimates
that the company will sell 24,000 units during the coming year.
In the past,

management has maintained inventories of finished good at
approximately
one month’s sales. The inventory at the start of the budget
period is 1,300
units, Sales occur evenly throughout the year .
Practice Problem 1: Estimate Production Level
Estimate the production level required for the coming year to
meet these
objectives.
East Mountain Bike expects to sell 25,000 electronic bicycles
next year. The
management estimates that the beginning and ending inventory
will be 2,000
units and 3,500 units, respectively.
Practice Problem 2: Estimate Production Level
Estimate the production level required for the coming year to
meet these
objectives.
next year.
The management estimates that the beginning and ending
inventory
will be 2,000 units and 3,500 units, respectively.
Practice Problem 3: Estimate Direct Material Cost

Refer to Practice problem 2
Estimate the total cost of direct materials budgeted
next year.
inventory
Practice Problem 3: Estimate Direct Material Cost
next year.
inventory
Practice Problem 4: Estimate Direct labor Cost
Direct labor time per unit (in hours) 0.20
Total direct labor-hours needed (a) = 26,500*0.2 = 5,300
Direct labor cost per hour 20SR
Total direct labor cost (b) = 5,300*20 = 106,000

Estimate the total cost of direct labor budgeted
Final Exam Information
• Date: May 18, 2014 (Sunday)
• Time: 07:00 PM
• Location: 14-108
• Coverage: Chapters 7, 8, 9, 11, and 13
28
Cost Allocation
Lecture 26
Chapter 11
Joint Cost Allocation
Joint Cost
Joint Products

Split-Off Point
Cost of a manufacturing process
with two or more outputs
Outputs from a common input
and common production process
Stage of processing that
separates two or more products
Joint Cost
Recap of what we covered last class
Joint Cost, Continued. . .
Joint Cost Flows
Mining Costs:
$270,000
Split-off
Point
Hi-Grade Coal: 15,000 units
Sales Value $300,000
Lo-Grade Coal: 30,000 units

Carlyle Coal Company
Allocation of Joint Costs
Net realizable value method
Physical quantities method
Joint cost allocation based on the proportional
values of the products at the split-off point.
Joint cost allocation based on measurement of the volume,
weight, or other physical measure of the joint products at
the split-off point.
Example: NRV Method
NRV Method; no additional processing costs
Hi-Grade Lo-Grade Total

Final sales value 300,000$ 450,000$ 750,000$
Less additional processing costs -0- -0- -
0-
Net realizable value at split-off point 300,000$ 450,000$
750,000$
Porportionate share
$300,000/$750,000 40%
$450,000/$750,000 60%
Allocated joint costs
$270,000 x 40% 108,000$
$270,000 x 60% 162,000$
Example: NRV Method, Continued. . .
Sales value 300,000$ 450,000$ 750,000$
Less allocated joint costs 108,000 162,000 270,000
Gross margin 192,000$ 288,000$ 480,000$
Gross margin as a percent of sales 64% 64% 64%

Gross Margin Computations
Example: Estimating NRV
When no sales value exists for outputs at the split-off point, the
Estimated NRV should be determined.
Further Processing of Coal: Cost Flows
Mining
Costs:
$270,000
Split-off
Point
Lo to Mid-Grade Coal: 30,000 units
Mid-Grade Sales Value
$550,000
$50,000 Processing costs
Sales Value ?

Example: Estimating NRV, Continued. . .
Using NRV
Sales value 300,000$ 550,000$ 850,000$
Less additional processing cost - 50,000 50,000
Estimated NRV at split-off 300,000$ 500,000$ 800,000$
Joint cost allocation: 101,250
a
101,250
- 168,750
b
168,750
Gross margin 198,750$ 331,250$ 530,000$
Gross margin as percent at sales 66% 60% 62%
a
($300,000/$800,000) x $270,000
b

($500,000/$800,000) x $270,000
Physical Quantities Method
Joint cost allocation based on measurement
of the volume, weight, or other physical
measure of the joint products at the split-off
point.
Significant processing occurs between the split-off point and
the first point of marketability.
Product prices are not set by the market.
Output product prices are unstable.
Example: Physical Quantities Method
a
(15,000 tons/45,000 tons) x $270,000 = 33.3% x $270,000
b
(30,000 tons/45,000 tons) x $270,000 = 66.7% x $270,000
Physical Quantities Method

Quantity (tons) 15,000 30,000 45,000
Allocation of joint costs 90,000
a
180,000
b
270,000
Sell or Process Further
Suppose CCC can sell lo-grade coal for
$450,000 at the split-off point or process it
further to make mid-grade coal. Mid-grade
coal would be sold for $550,000 and
additional processing costs would be
$50,000.
Sell Process Further Differential
Lo-Grade Mid-Grade Revenue/Costs
Revenues 450,000$ 550,000$ 100,000$
Less separate processing costs -0- 50,000

50,000
Margin 450,000$ 500,000$ 50,000$
$50,000 net gain from processing further
By-products
By-products are outputs of joint production
processes that are relatively minor in quantity
or value.
Joint Cost
Upstream
Costs:
$XXXXXX
Split-off
Point
Gasoline
Diesel Oil
Benzene

Jet A-1
Kerosene
Crude Oil
Gas
By-products
or value.
The net realizable value from sale of the
by-product is deducted from the joint
costs before allocation to the main
products.
The proceeds from sale of
the by-product are treated
as other revenue.
Method 1 Method 2

Example: By-products – Method One
Hi-Grade Lo-Grade By-product Total
Sales value 300,000$ 450,000$ 15,000$ 765,000$
Less additional processing costs -0- -0-
-0- -0-
15,000$ 765,000$
Deduct sales value of by-product
a
-0- -0- (15,000) (15,000)
Allocate remaining joint costs
a
(102,000)
b
(153,000)
c
-0- (255,000)
Gross margin 198,000$ 297,000$ -0- 495,000$
Gross margin as a percent of sales 66% 66% 0% 65%
a
Joint costs adjusted for sales value of by-product
b

$300,000/$750,000 or 40% x ($270,000 - $15,000)
c
$450,000/$750,000 or 60% x ($270,000 - $15,000)
By-Product
Example: By-products – Method Two
Hi-Grade Lo-Grade By-product Total
Sales value 300,000$ 450,000$ 15,000$ 765,000$
Less additional processing costs -0- -0-
-0- -0-
15,000$
a
765,000$
Allocated joint costs (108,000)
b
(162,000)
c
-0- (270,000)
Gross margin 192,000$ 288,000$ 15,000$ 495,000$
Gross margin as a percent of sales 64% 64% 100% 65%

By-Product
a
Value of by-product reported as other income
b
$300,000/$750,000 or 40% x $270,000
c
$450,000/$750,000 or 60% x $270,000
Service Department Cost
Allocation
Practice Problems
Service Department Cost Allocation, Continued. . .
Carlyle Coal Company (CCC)
Service Department:
Information Systems (S1)
Service and User Departments of
Service Department:

Administration (S2)
User Department:
Hilltop Mine (P1)
User Department:
Pacific Mine (P2)
Information Systems (S1) Total S1 Costs $800,000
Allocation Base: Computer Hours
User Department Number of Hours Used Percent of Total
Administration (S2) 100,000 50%
Hilltop Mine (P1) 20,000 10%
Pacific Mine (P2) 80,000 40%
Totals 200,000 100%
Administration (S2) Total S2 Costs $5,000,000
Allocation Base: Employees

User Department Employees Percent of Total
Information Systems (S1) 2,000 20%
Totals 10,000 100%
Service Department Allocation Method:
1. Direct method.
2. Step method.
3. Reciprocal method.
User Department Number of Hours Used
Administration (S2) 100,000
Hilltop Mine (P1) 20,000
Pacific Mine (P2) 80,000
Totals 100,000

Number of Hours Used Percent of Total
50%
10% 20%
40% 80%
100%
User Department Employees
Information Systems (S1) 2000
Totals 8,000
Employees Percent of Total
20%
50% 62.5%
30% 37.5%
100%
Administration (S2)

Cost Allocation: Direct Method
Service Department Cost Allocation
Service Department Direct Cost P1 P2 Total
S1 800,000$ 20.0%
a
80.0% 100.0%
S2 5,000,000 62.5%
b
37.5% 100.0%
Percent Allocable to
S1 800,000$ 160,000$
c
640,000$ 800,000$
S2 5,000,000 3,125,000
d
1,875,000 5,000,000
Total allocated 5,800,000$ 3,285,000$ 2,515,000$
5,800,000$
Cost Allocation: Step Method

Service Department Direct Cost S1 S2 P1 P2 Total
S1 800,000$ 0% 50%
a
10.0%
b
40.0%
c
100.0%
S2 5,000,000 0% 0% 62.5%
d
37.5%
e
100.0%
From S1 S2 P1 P2 Total
800,000$ 5,000,000$ 5,800,000$
k
S1 (800,000) 400,000
f
80,000
g
320,000

h
-0-
S2 -0- (5,400,000) 3,375,000
i
2,025,000
j
-0-
Total $ -0- $ -0- 3,455,000$ 2,345,000$
5,800,000$
k
To
28
Practice Problem 1: Cost Allocation: Direct Method
0.625 0.375
0.5
29
Practice Problem 2: Allocating service department costs
first to Production Departments and Then Jobs

30
Practice Problem 2: Allocating service department costs
first to Production Departments and Then Jobs
$149,596
$210,404
31
Practice Problem 3: Cost Allocation: Step Method
32
Practice Problem 3: Cost Allocation: Reciprocal Method
Total Service
Department
Direct cost of the

service department
Cost allocated from other
service departments
= +
33
Practice Problem 3: Cost Allocation: Reciprocal Method
34
Practice Problem 4: Joint Costs: NRV Method
35
Practice Problem 5: Joint Costs: NRV Method
36
Practice Problem 6: Joint Costs: Estimated NRV Method
Diagram the processing cost flows

37
Practice Problem 6: Joint Costs: Estimated NRV Method
38
Practice Problem 7:
Joint Costs: NRV Method to Solve for Unknowns
By-products
or value.
The net realizable value from sale of the
by-product is deducted from the joint
costs before allocation to the main
products.
The proceeds from sale of
the by-product are treated
as other revenue.

Method 1 Method 2
40
Practice Problem 8:
Joint Costs: NRV Method with By-Product
Total joint costs = 351,000
Total sales value at split-off for main products = 675,000
41
Total joint costs = 351,000
Total sales value at split-off for main products = 675,000
= 195,000
Practice Problem 8:
Joint Costs: NRV Method with By-Product
42
Practice Problem 9: Joint Cost: Physical Quantities Method
Given

Amount Allocated
from joint cost
43
Practice Problem 9: Joint Cost: Physical Quantities Method
Given
Amount Allocated
from joint cost
44
Practice Problem 10:
Joint Cost: Physical Quantities Method with By-Product
The net processing costs to be allocated = 270,000 – 10,000 =
260,000
Cost Allocation
Lecture 25
Chapter 11

Overview:
1. Explain why service costs are allocated.
2. Allocate service department costs using the direct method.
3. Allocate service department costs using the step method.
4. Allocate service department costs using the reciprocal
method.
5. Explain why joint costs are allocated.
6. Allocate joint costs using the net realizable value method.
7. Allocate joint costs using the physical quantities method.
Service Department Cost
Allocation
Department that uses the
functions of service departments.
Department that provides service

to other subunits in the
organization.
Cost center whose costs are
charged to other departments in
the organization.
Service Department User Department
Intermediate Cost Center
Cost center, such as a production
department, whose costs are not
allocated to another cost center.
Final Cost Center
Product costing
Carlyle Coal Company (CCC)
Service Department:

Service and User Departments of
Service Department:
Administration (S2)
User Department:
Hilltop Mine (P1)
User Department:
Pacific Mine (P2)
Total S1 Costs $800,000
Totals 200,000

50%
10%
40%
100%
Administration (S2)
Total S2 Costs $5,000,000
Information Systems (S1) 2,000
Totals 10,000
Percent of Total
20%
50%

30%
100%
Service Department Allocation Method:
1. Direct method.
2. Step method.
3. Reciprocal method.
Direct Method
Charges costs of service departments to
user departments without making
allocations between or among service
departments.
Direct Method:
S1 S2
P1 P2

Total S1 Costs $800,000
Totals 100,000
50%
10% 20%
40% 80%
100%
Administration (S2)
Total S2 Costs $5,000,000

Information Systems (S1) 2000
Totals 8,000
Employees Percent of Total
20%
50% 62.5%
30% 37.5%
100%
Cost Allocation: Direct Method
a
20% = 20,000 hours/(20,000 hours + 80,000 hours)
b
62.5% = 5,000 employees/(5,000 employees + 3,000 employees)
Service Department Direct Cost P1 P2 Total
S1 800,000$ 20.0%
a

80.0% 100.0%
S2 5,000,000 62.5%
b
37.5% 100.0%
S1 800,000$ 160,000$
c
640,000$ 800,000$
S2 5,000,000 3,125,000
d
1,875,000 5,000,000
Total allocated 5,800,000$ 3,285,000$ 2,515,000$
5,800,000$
c
$160,000 = 20% x $800,000
d
$3,125,000 = 62.5% x $5,000,000
Step Method
The step method allocates some service department
costs to other service departments.

Once an allocation is made from a service department no further
allocations are made back to that service department. Generally
allocate in order of proportion of services provided to other
service
departments.
S1 S2
P1 P2
Cost Allocation: Step Method
Service Department Direct Cost S1 S2 P1 P2 Total
S1 800,000$ 0% 50%
a
10.0%
b
40.0%
c
100.0%
S2 5,000,000 0% 0% 62.5%
d

37.5%
e
100.0%
800,000$ 5,000,000$ 5,800,000$
S1 (800,000) 400,000
f
80,000
g
320,000
h
-0-
S2 -0- (5,400,000) 3,375,000
i
2,025,000
j
-0-
Total $ -0- $ -0- 3,455,000$ 2,345,000$
5,800,000$
To

Reciprocal Method
Recognizes all services provided by any service department,
including services provided to other service departments
The reciprocal method accounts for cost
flows among service departments
providing services to each other.
It requires a
simultaneous equation
solution.
S1 S2
P1 P2
The Simultaneous Equation
1. Write the costs of each service
department in equation form.
Total Service
Department
Direct cost of the

service
department
Cost allocated from
other service
departments
2. Solve equations
simultaneously using
matrix algebra.
= +
Cost Allocation: Reciprocal Method
S2 = $5,000,000 + $400,000 + 0.10 S2
S2 = $6,000,000
1. S1 = $800,000 + 0.20 S2
2. S2 = $5,000,000 + 0.50 S1
S2 = $5,000,000 + 0.50 $800,000 + 0.20 S2
.90 S2 = $5,400,000

Example: Reciprocal Method
S1 = $800,000 + 0.20 $6,000,000
S1 = $2,000,000
Example: Reciprocal Method, Continued. . .
Service Department Total Costs S1 S2 P1 P2 Total
S1 2,000,000$ 0% 50%
a
10.0%
b
40.0%
c
100.0%
S2 6,000,000 20%
d
0% 50.0%
e
30.0%
f
100.0%

Totals 200,000
50%
10%
40%
100%
User Department Employees Percent of Total
Information Systems (S1) 2,000 20%
Totals 10,000 100%
Example: Reciprocal Method, Continued. . .

Service Department Total Costs S1 S2 P1 P2 Total
S1 2,000,000$ 0% 50%
a
10.0%
b
40.0%
c
100.0%
S2 6,000,000 20%
d
0% 50.0%
e
30.0%
f
100.0%
Direct costs 800,000$ 5,000,000$ $ -0- $
-0- 5,800,000$
i
S1

a
1,000,000
b
200,000
c
800,000
d
-0-
S2 1,200,000
e f
3,000,000
g
1,800,000
h
-0-
Total $ -0- $ -0- 3,200,000$ 2,600,000$
5,800,000$
i
To
i $5,800,000 of service
department costs were
ultimately allocated to

production departments.
(2,000,000)
(6,000,000)
Comparison of Direct, Step, and Reciprocal Method
Method Hilltop Mine Pacific Mine Total
Direct 3,285,000$ 2,515,000$ 5,800,000$
Step 3,455,000 2,345,000 5,800,000
Reciprocal 3,200,000 2,600,000 5,800,000
Cost Allocated to
Overview:
1. Explain why service costs are allocated.
2. Allocate service department costs using the direct method.
3. Allocate service department costs using the step method.
4. Allocate service department costs using the reciprocal
method.

5. Explain why joint costs are allocated.
6. Allocate joint costs using the net realizable value method.
7. Allocate joint costs using the physical quantities method.
Joint Cost
Joint Products
Split-Off Point
Cost of a manufacturing process
with two or more outputs
Outputs from a common input
and common production process
Stage of processing that
separates two or more products
Joint Cost
Joint Cost
Upstream
Costs:

$XXXXXX
Split-off
Point
Gasoline
Diesel Oil
Benzene
Jet A-1
Kerosene
Crude Oil
Joint Cost, Continued. . .
Joint Cost Flows
Mining Costs:
$270,000
Split-off
Point

Lo-Grade Coal: 30,000 units
Evaluating executive performance
Valuing products
Physical quantities method
Net realizable value (NRV)
Sales value of each product at the split-off point.
Joint cost allocation based on the proportional values of
the products at the split-off point.
Estimated net realizable value
Sales price of a final product minus additional processing

costs necessary to prepare a product for sale.
Example: NRV Method
NRV Method; no additional processing costs
Final sales value 300,000$ 450,000$ 750,000$
Less additional processing costs -0- -0- -
0-
750,000$
Porportionate share
$300,000/$750,000 40%
$450,000/$750,000 60%
Allocated joint costs
$270,000 x 40% 108,000$
$270,000 x 60% 162,000$
Example: NRV Method, Continued. . .

Sales value 300,000$ 450,000$ 750,000$
Less allocated joint costs 108,000 162,000 270,000
Gross margin 192,000$ 288,000$ 480,000$
Gross margin as a percent of sales 64% 64% 64%
ISE304.01 Principles of Industrial Costing Second
Semester 2013-14 (132)
Dr. Mojahid F. Saeed Osman/ISE304.01/Term132/HW6/May 8,
2014 1
Homework Assignment 6 (Optional)
Due on Wednesday May 15, 2014
Submission Instructions:
• Make sure your name is listed on a cover sheet as the first
page of the document.
• Each question should be numbered.
• Hand written homework will be accepted. However, you will
have a credit of 5% of the total

possible points for typing the entire homework in MS word.
Read Chapter 11 in your textbook
1.
a) A manufacturing firm has two service departments (S1 and
S2) and three production departments
(P1, P2, P3 and P4). The following table shows the costs
incurred at the two service departments, as
well as the proportion of services provided by the two service
departments to the other departments.
Proportion of services provided to:
Costs
incurred
Service
department
S1
S2

P1
P2
P3
P4
4,500,000SR S1 - 15% 20% 25% 30% 10%
1,160,000 S2 20% - 10% 30% 15% 25%
Allocate the service department costs to the production
departments using the following techniques:
(i) Direct Method (5 points)
(ii) Step Method (5 points)
(iii) Reciprocal (5 points)
b) A company produces three products in a joint production
process. For the month of April 2014,
130,000SR of materials, and 210,000SR labor and overhead
were added to produce the three main
products: X, Y, and Z. The sale values were available right after
the split-off point. The following
diagram shows the process.

X
Sale value 160,000SR
12,000 units
Joint costs
Y
16,000 units
Z
19,200 units
i) Allocate the joint costs to the products using the net
realizable value method. (5 points)
ii) Allocate the joint costs to the products using the physical
quantities method. (4 points)
iii) If products X, Y and Z needed further processing with
additional costs of 36,000SR, 24,000SR, and
30,000SR respectively before they could be marketable for
220,000SR, 280,000SR , and 365,000SR

respectively. Allocate the joint costs to the products using the
estimated net realizable value
method. (6 points)
ISE304.01 Principles of Industrial Costing Second
Semester 2013-14 (132)
Dr. Mojahid F. Saeed Osman/ISE304.01/Term132/HW6/May 8,
2014 2
Read Chapter 13 in your textbook
A manufacturing company expects to sell 15,000 units of its
new product next year at a price of 200SR. The
management estimates that the beginning and ending inventory
will be 6,000 units and 7,200 units,
respectively.
Each unit of product can be produced in 15 minutes of direct
labor time. Direct labor is paid at the rate of
30SR per hour. Each unit produced requires three major
components (X, Y and Z). The following information

is available:
Component X Component Y Component Y
Components per unit 4 1 2
Cost per component 15 40 25
Expected beginning inventory 5,000 15,000 3,000
Expected ending inventory 2,400 6,000 1,100
The fixed manufacturing overhead for the year is estimated at
50,400SR and the variable manufacturing
overhead varies at the rate of 2SR per direct labor hour. For the
next year, prepare the following:
(A) a production budget. (3 points)
(B) a materials purchases. (9 points)
(C) a labor cost budget. (3 points)
(D) a budget for manufacturing overhead. (3 points)
(E) an expected gross margin. (2 points)
Total Possible Points: 50

Planning and budgetingLecture 27Chapter 13 Modified.docx

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