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Cost Accounting - 1

Decision Making: Incremental Revenue and Differential Cost Approach

Incremental revenue = the difference in total revenue Differential cost = the difference in total revenue. If IR > DC then the proposals are accepted Applications of Different Cost Analysis: Management may rely on different costs for taking many policy decision, such as 1. 2. 3. 4. 5. 6. 7. accept an additional order offered at a price below the existing price of the product. volume of production will the profit be maximum Whether a new product can be profitably introduced.? Whether a new sales area/territory can be opened. Is it profitable to change the existing asset by an improved model profitable? Is the replacement of the existing asset by an improved model profitable? Is it profitable to go in for further processing of a product?

Marginal Costing vs. Differential Cost Analysis Similarities 1. 2. Both are techniques of cost analysis and presentation and are used for formulating policies and for taking management decisions. When fixed costs remain same, both marginal costs and differential costs are the same. if variable cost per unit is constant

Dissimilarities 1. 2. Differential costs apply to a fixed additional quantity of production while marginal costs apply to any additional unit. The method of cost presentation may not be same under the two. For instance, marginal costs are ascertained on the basis of contribution approach while differential costs may be ascertained under both absorption and marginal costing techniques Under marginal costing, product costs do not include fixed costs while differential costs may include fixed costs which are common or traceable if the additional volume involves additional fixed cost outlay. Unlike marginal costing, differential cost analysis statements do not find their place in accounting records. In marginal costing, unit contribution, p/v ratio, contribution per unit of limiting factor etc. are taken as yardsticks for evaluation of performance and marginal decisions. On the other hand, in differential cost analysis, differential costs are compared with incremental revenues for many policy decisions.

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Cost Accounting - 2

Problems : 1. A Company has a capacity of producing 1,00,000 units of a certain product in a month. The Sales Department reports that the following schedule of sales prices is possible. Volume of Production Selling price per unit Re 60% 0.90 70 % 80% 0.80 0.75 90% 0.69 100% 0.63

The variable cost of manufacture between these levels is Re. 0.15 per unit. Fixed cost Rs. 40,000. (a) Prepare a statement showing incremental revenue and differential cost at each stage. At which volume of production will the profit be maximum? (b) If there is a bulk offer at Re. 0.50 per unit for the balance capacity over the maximum profit volume for export and price quoted will not affect the internal sale, will you advise accepting this bid and why? 2. A box manufacturing Company is at present operating at the 80% capacity level, the production being 15,000 units per annum. The following relevant figures are obtained from the Companys budget at different capacity-utilisation levels: Capacity-utilisation level 80% 100% Rs. Rs. 20,00,000 25,00,000 2,25,000 2,50,000 1,05,000 1,11,000 4,00,000 4,70,000 15,000 18,750

Sales Variable overheads Semi-variable overheads Fixed overheads Output (in units)

The management expects a profit margin of 10% on sales. You are required to work out the differential cost of producing the additional 3,750 units by increasing the capacity utilisation level to 100 per cent. 3. The News Paper Group is to commence publication of a weekly leaflet called SENSATION. They have ascertained that printing costs will be as follows: Number of copies Cost (Rs.) 5,000 1,250 6,000 1,440 7,000 1,662 8,000 1,840 9,000 1,900

Additional costs will be 10 p delivery cost for each copy ordered and a 15% commission payable on each copy sold. Any unsold copies are considered worthless. The management has as yet not decided on a selling price for the leaflet and has ascertained that demand will be as follows at the following prices : Price (p) Demand 55 60 65 70 75 9,000 8,000 7,000 6,000 5,000

(a) Calculate the number of copies that the management should order and the selling price that it should set. (b) Assuming that 9,000 copies had been ordered and the selling price set as 65 p, advise the management whether to accept an up country order at 25 p a copy for 2,000 copies. (Demand is up country order at 25 p, a copy for 2,000 copies. (Demand is expected to fall by 10% as a result of accepting the offer. )

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Cost Accounting - 3

4.

S.R. Ltd. manufactures 3 products A, B & C. The details are as under : Product Per Unit Direct Materials Direct labour Variable Overhead Selling Price Output per day (units) A Rs. 15 7 3 30 110 B Rs. 19 5 6 38 60 C Rs. 25 11 4 50 50

or

or

If sale of product A exceeds 50 units a day, the selling price is expected to fall to Rs.29 a unit for each additional unit; if sale of C exceeds 20 units a day, the selling price is expected to fall to Rs.49 a unit; and if sales of B exceeds 15 units a day, the price is expected to fall to Rs.37 a unit. The company works an eight-hour day and on an average 40 minutes daily are taken up by machine setting up time. The constraint is the machine capacity. Work out the optimum level of production that would maximum profits for the company. 5. Hitech Ltd. makes two products-CROWN and PEAK. Both the products use the same labour force, the size of which is restricted to 38,000 hours per month. CROWN needs two hours per unit to make whereas PEAK needs one hour. The estimated manufacturing and selling expenses etc. are as follows : Production and Sales CROWN 8,000 10,50,000 PEAK 20,000 16,00,000 24,000 18,40,000

Nos. per month 6,000 Costs per month (Rs.)8,50,000

The company is considering pricing options in a highly competitive market. It has estimated sales demand at various selling prices as under : CROWN Selling Price Sales Demand per unit per month (Rs.) (Nos) 138 136 134 132 130 127 Required : (a) What would be the profit maximising selling price and monthly sales quantity for each product, if direct labour was available in unlimited supply ? (b) Given the restriction of 38,000 hours per month, what is the profit maximising sales price and quantity for each product ? 6,000 7,000 8,000 9,000 10,000 11,000 PEAK Selling price Sales Demand per unit per month (Rs.) (Nos) 81.50 81.00 80.50 80.00 78.00 76.00 20,000 21,000 22,000 23,000 24,000 25,000

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Cost Accounting - 4

6.

A company furnishes the following data : Products B Variable costs / unit Rs. 24 Machine-hours / unit 3 Fixed costs p.a. Rs.3,00,00 Plant capacity in machine-hours p.a. 21,000. A 18 3 C 39 6

The market survey conducted by the company reveals the following price / demand relationship : A B C Price Demand Price Demand Price Demand (Rs.) (Units) (Rs.) (Units) (Rs.) (Units) 73.50 1,000 102 1,000 165 1,000 70.50 2,000 99 2,000 160 2,000 67.50 3,000 96 3,000 153 3,000 64.50 4,000 93 4,000 145 4,000 Taking a block of 3000 hours, you are required to prepare a schedule showing the best price and best quantities to maximise profits over the plant capacity. 7. Research in a departmental store established that there were three primary selling areas in a store : the Front Counters, the Main Counter ,& the Basement. An article would sell twice as fast if placed in Main Store as it would if it were placed in the Basement and three times as fast if it were placed on the Front counter. Each area is divided into selling counter statistics can be shown as follows: Area Basement Main Store Front Counter no. of counters 2 3 3 Relative turnover Standard 2x Standard 3x Standard

Each counter carries one product, and products can be sold in more than one counter, though sales on the additional counters have the following pattern: Turnover in relation to sales on the 1st counter. on the 2nd counter = 1/2 of 1st counter sales; on the 3rd counter = 1/3 of 1st counter sales; The fixed costs of the store are Rs.4000 per week, and it is company policy to carry all products A to H. Given the following product statistics, determine which products should be sold in each area in order to maximize profit and compute what this profit figure would be. Product A B C D E Selling price(Rs) 2.00 0.40 0.80 1.25 4.00 P/V ratio(%) 25 25 25 30 40 Standard weekly turnover(units) 336 1,320 1,020 320 25