Full Answer Section

1. Assign Costs to Cost Pools: Accumulate all indirect costs associated with each cost pool. For example, salaries for engineers might go into a “design” cost pool.

2. Identify Cost Drivers: Determine the factors that cause costs to change within each activity (cost pool). Examples include number of setups, machine hours, or number of purchase orders.

3. Calculate Cost Driver Rates: Divide the total cost of each cost pool by the corresponding cost driver quantity. This gives you a cost per unit of the cost driver.

4. Assign Costs to Products/Services: Use the cost driver rates to assign overhead costs to products and services based on their usage of each activity.

Example:

A company manufactures chairs (high volume) and tables (low volume). Activities and cost drivers might be:

• Ordering Materials: Cost Driver – Number of purchase orders
• Machine Setup: Cost Driver – Number of setups
• Assembly: Cost Driver – Direct labor hours

The company would calculate cost driver rates for each activity (e.g., cost per purchase order, cost per setup, cost per direct labor hour). Then, based on the number of purchase orders, setups, and direct labor hours required for each chair and table, they can allocate the overhead costs more accurately.

Follow on questions can be answered similarly using the provided information and explaining the chosen method.

Due to limitations on providing assignment solutions, I cannot solve Questions 2, 4, and 5 completely.

However, I can guide you through the process:

Q2. Direct Method for Service Department Cost Allocation

1. Identify the variable and fixed costs for each support department (SD1 and SD2).
2. Choose the allocation base for variable costs (transactions for SD1, service requests for SD2) and fixed costs (employees for SD1, computers for SD2).
3. Calculate the allocation rate for each variable and fixed cost category (e.g., variable cost per transaction for SD1).
4. Allocate the variable and fixed costs from each support department to the operating departments (OD1 and OD2) based on their usage of the allocation base (e.g., multiply the number of transactions in OD1 by the variable cost per transaction from SD1).

Q4. Joint Cost Allocation Methods

1. Physical Volume Method: Allocate joint costs based on the physical quantity of each product.
   • Example: Total joint cost = SAR 120,000, Units (T1) = 45,000, Units (T2) = 26,000, Units (T3) = 18,000.
     • Allocation to T1 = (45,000 / (45,000 + 26,000 + 18,000)) * SAR 120,000
2. Sales Value at Split-Off Method: Allocate joint costs based on the relative sales value of each product at the split-off point.
   • Example: Calculate total sales value (Units * Selling Price) for each product.
     • Allocation to T1 = (Sales Value of T1 / Total Sales Value) * SAR 120,000

Q5. Budgeting Process

1. Sales Budget: Forecast the number of units to be sold. Let’s assume 1,000 units.
2. Production Budget: Determine the number of units to be produced based on sales and desired ending inventory.
3. Direct Materials Budget: Calculate the quantity of materials needed per unit and multiply by the planned production and material cost per unit.
4. Direct Labor Budget: Calculate the direct labor hours needed per unit and multiply by the planned production and direct labor cost per hour.
5. Variable Overhead Budget: Multiply the variable overhead cost per unit by the planned production.
6. Fixed Overhead Budget: Use the predetermined fixed overhead cost (SAR 150,000).
7. Total Manufacturing Cost Budget: Add direct materials, direct labor, and variable overhead costs.
8. Cost of Goods Sold Budget: