Question

Al Wathba Printing Services is a family business established in Oman in the year 2011 with an objective to provide world-class printing solutions of the corporate customers in Oman. The firm is experiencing a steady growth in the business over the past 9 years and is highly appreciated by all its customers. From the last five years, the firm is receiving majority of its orders from four major customers and is executing the orders ensuring quality and consistency. As the firm is established as a family business, they appointed one person as a financial accountant who records all the expenses and calculates the profit by deducting total expenses from total income. The owners of the firm are satisfied with this method as they were into profits since inception. However, the owners noticed that the quantum of profits started declining from the past two years and they believe that it is due to the increase in the expenses. In light of the current scenario, the firm appointed you as a cost accountant and you were asked to identify the reasons for the declining in the profits. The financial accountant provided the following data for the month of April 2020. Particulars Total Total income from the four Jobs 2250 Less : Direct Material Cost @ RO 20 per Kg (1320) Direct Labour Cost @ RO 15 per hour (450) Overheads (330) Total Expenses 2100 Profit 150 After further investigation into the expenses incurred,

you identified the following points:

(a) The price of the job charged to Job 1, Job 2, Job 3 and Job 4 is RO 425, RO 600, RO 525 and 700 respectively.

(b) The raw material cost charged to Job 1, Job 2, Job 3 and Job 4 is RO 260, RO 310, RO 350 and RO 400 respectively.

(c) The labour hours used for completion of the Job 1, Job 2, Job 3 and Job 4 were 9 Hrs, 11Hrs, 12Hrs and 13Hrs respectively. 8

(d) The overheads need to be charged to the jobs based on consumption of raw material. As a cost accountant, you suggested the firm to adopt job costing technique in its firm to ascertain the profits and to determine the price of the jobs. The owners of the business have asked you to submit a report on the same for their consideration.

You are required to

a) Analyse the profitability of each job in the month of April 2020 by preparing T accounts.

b) Advise the firm, how much price should be charged to each job in the next month assuming the material costs are expected to increase by 10% and assuming the firm needs a mark-up of 20%. (Round off the Job price to the nearest hundreds)

c) Prepare a report to assist the owners of the business to take a decision.

Answer 1

		No of hours/ kg
Total Income	2250
Total Expense
Direct Material Cost @ RO 20 per Kg (1320)	1320	66
Direct Labour Cost @ RO 10 per hour	450	45
Overheads	330
	2100
Profit	150

Note

1. In the question labor rate per hour is given as 15 so no of labor hours has to be 30 hours but as per the question the number of labor hours for all the jobs 9+11+12+13=45 hours hence assumed per hour cost = 10

2.Overheads are charged based on the consumption of raw material so

Overheads	330
Direct Material Cost @ RO 20 per Kg (1320)	1320

Job 1	Job 2	Job 3	Job 4
330/1320*260	77.5	87.5	100

a.

JOb1
Particulars	Debit	Particulars	Credit
Direct Material Cost	260	Price charged	425
Direct Labour Cost @ RO 10 per hour	90
Overheads	65
Profit	10
mark up %	2%

JOb2
Particulars	Debit	Particulars	Credit
Direct Material Cost	310	Price charged	600
Direct Labour Cost @ RO 10 per hour	110
Overheads	77.5
Profit	102.5
mark up %	21%

JOb3
Particulars	Debit	Particulars	Credit
Direct Material Cost	350	Price charged	525
Direct Labour Cost @ RO 10 per hour	120
Overheads	87.5
Profit	-32.5
mark up %	-6%

JOb4
Particulars	Debit	Particulars	Credit
Direct Material Cost	400	Price charged	700
Direct Labour Cost @ RO 10 per hour	130
Overheads	100
Profit	70
mark up %	11%

b.

Price to be charged assuming the material costs are expected to increase by 10% and assuming the firm needs a mark-up of 20%

	Job 1	Job 2	Job 3	Job 4
Material cost	260	310	350	400
Increased cost of materials	286	341	385	440
Other costs( DL+OH)	155	187.5	207.5	230
Total cost	441	528.5	592.5	670
mark up 20%	88.2	105.7	118.5	134
Price to be charged	529.2	634.2	711	804

c Report for owners.

Currently, owners are the following system which use to calculate profit considering total costs and total expense. By following such practice, owners failed to understand job-wise performance effectively.

Because in the case of job 3 (a) owners failed to recover the cost that they have incurred for that job and job 2 is giving more profits.

So instead of using total cost and total income approach if they use job-wise mark up then none of their jobs would be at loss and also increase in cost if any would be considered for mark up

Owners are assuming that increase in cost is the main reason for declining the profits but if they use Job wise analyze then it would be better for them to understand what is the actual reason for declining the profits as in the case of job 3 the main reason for the loss is not charging sufficient ( Ineffective ) price to the customers