costing for decision making_teupdate_final

7/29/2019 Costing for Decision Making_teupdate_final

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ProfessionalDevelopment

Programme on

Enriching

KnowledgeoftheBusiness,AccountingandFinancialStudies

(BAFS)Curriculum

Course Title: Cost Accounting for Decision Making

1


2/102

LearningOutcomes

Uponcompletionofthiscourse,teacherparticipantsshould

beableto:

applycostvolumeprofitanalysistechniquestoascertaintheinterrelationshipsamongcosts,sellingprice,unitssold,

breakevenpoint,targetprofitandmarginofsafety;

statetheassumptionsandlimitationsofcostvolumeprofitanalysis;

identifyanddifferentiaterelevantcostsandirrelevantcostsindifferentbusinessscenarios;and

makerecommendationtoshorttermbusinessdecisions.

2


3/102

Syllabusin

HKDSE

Examination

Identify thenatureofvariouscostitemsandtheir

relevanceto

decision

making:

sunk

costs,

incremental

costsandopportunitycosts.

Apply costingconceptsandtechniquesinbusiness

decisions,e.g.

hire,

make

or

buy,

accept

or

reject

an

orderataspecialprice,retainorreplaceequipment,

sellorprocessfurther andeliminateorretainan

unprofitablesegment.

Conductcostvolumeprofitanalysistoassesstheeffectsofchangesincosts,sellingpriceandunitssoldonthe

breakevenpointandtargetprofit.

Identify thenatureofvariouscostitemsandtheir

relevanceto

decision

making:

sunk

costs,

incremental

costsandopportunitycosts.

Apply costingconceptsandtechniquesinbusiness

decisions,

e.g.

hire,

make

or

buy,

accept

or

reject

an

orderataspecialprice,retainorreplaceequipment,

sellorprocessfurther andeliminateorretainan

unprofitablesegment.

Conductcostvolumeprofitanalysistoassesstheeffectsofchangesincosts,sellingpriceandunitssoldonthe

breakevenpointandtargetprofit.

3

Whatifanalysis


4/102

Contents Breakevenpoint

Salelevelrequiredtoachievetargetprofit

Marginof

safety

Whatifanalysis(Illustrations1&2)

Salesmix(Illustration3&4)

Relevantcosts

vs.

irrelevant

costs

(Illustrations

5&

6)

Acceptorrejectanorder(Illustration7)

Hiredecision(Illustration8)

Make

or

buy

(illustration

9) Retainorreplaceequipment(Illustration10)

Sellorprocessfurther(Illustration11)

Eliminateorretainanunprofitablesegment(Illustration12)

4


5/102

PriorKnowledge

Required

5


6/102

CostVolume

Profit

Analysis

(CVPAnalysis)

(BreakevenAnalysis)

6


7/102

Whatis

it?

Breakeven=noprofit,orloss,thatis,

TotalSales

Revenue

=Total

Costs

(Variable

Costs

+

FixedCosts)

TotalContribution=FixedCosts

Itstudieshowcost,revenueandproduction/salesvolumeaffectprofit

Twoapproaches:

ByFormula

ByGraph7


8/102

BreakevenPoint

By

Formula

8

or

where


9/102

SalesLevel

Required

to

Achieve

TargetProfit

9

or


10/102

Marginof

Safety

By

Formula

10


11/102

Whatif

Analysis

Itstudieshowtheresultwillchangeifthe

originaldata

changes.

Itanswersquestionssuchas:

What

will

be

the

breakeven

point

if

variable

cost

perunitincreasedby5%?

What will be the profit if sales volume increases

by

5%?

11


12/102

Effectsof

Changes

in

Costs,

Selling

Price

ontheBreakevenPoint

12


13/102

Illustration1

EffectofChangesinCostsonBreakevenPoint

Amanufacturingcompanyproducesandsells

asingleproductasfollows:

Thefixedcostperannumisestimatedtobe

$600,000.

13

Sellingpriceperunit $250

Variablecosts

per

unit $150


14/102

Illustration

1EffectofChangesinCostsonBreakevenPoint

Thesalesmanagerwouldliketoproposea

changeto

pay

asalesman

on

commission

basisof$10perunitsoldratherthanonfixed

monthlysalariesof$8,000permonth.

Whatwouldbethebreakevenpointsinunitsforthesituationsbeforeandafterthe

change?

14


15/102

Illustration1

Effectof

Changes

in

Costs

on

Breakeven

Point

Breakevenpointbeforechange:

$600,000/($250$150)

=6,000units

Breakevenpointafterchange:

($600,000

$8,000

x

12)/[$250

($150+$10)]=5,600units

15


16/102

Illustration1

Effectof

Changes

in

Costs

on

Breakeven

Point

Itdoesnotmeanthattheproposedscenario

isbetter

than

the

original

scenario

because

of

lowerbreakevenpoint.

Italldependsontheactualsalesvolume.

Forexample,ifthesalesvolumeis10,000units,theprofitintheoriginalscenariowillbe

$400,000(10,000

x$100

$600,000)

while

thatinproposedscenarioitwillonlybe

$396,000(10,000x$90 $504,000).

16


17/102

Effectsof

Changes

in

Costs,

Selling

Price

andUnitsSoldontheProfit

17


18/102

Illustration2

Effectsof

Changes

in

Costs

and

Units

Sold

on

the

Profit

Acompanyproducesandsellsasingle

product.In

the

current

year,

20,000

units

will

besoldat$50each.Thefixedcostis$300,000

andtheprofitis$100,000.

Thecompanyisconsideringspending$30,000tolaunchapromotioncampaigninthenext

yearto

boost

the

sales

volume

by

5%.

Thesellingpriceandotherfixedoverheadwillkeepconstantoverthetwoyears.

18


19/102

Illustration2

Effectsof

Changes

in

Costs

and

Units

Sold

on

the

Profit

Required

1)Forthe

current

year,

calculate:

a) thebreakevenpoint inunits,and

b) themargin

of

safety

in

%

2)Preparetheincomestatementsforboth

currentyearandnextyear.

3)Explainwhetherthepromotioncampaign

shouldbelaunched.

19


20/102

Illustration2

Effectsof

Changes

in

Costs

and

Units

Sold

on

the

Profit

1) a) Totalcontribution

=$300,000

+$100,000

=$400,000

Contributionperunit=$400,000/20,000=$20

Breakevenpointinunits=$300,000/$20=15,000units

b) Marginof

safety

in

%

=(20,000

15,000)/20,000

x100%

=25%

20


21/102

Illustration2

Effectsof

Changes

in

Costs

and

Units

Sold

on

the

Profit

ContributionIncome

Statements

CurrentYear NextYear

$ $

Sales($50perunit) 1,000,000 1,050,000

Variablecost($30perunit) 600,000 630,000

Totalcontribution 400,000 420,000

Less:Fixedcost 300,000 330,000

Net

Profit 100,000 90,000

21

2)


22/102

Illustration

2EffectsofChangesinCostsandUnitsSoldontheProfit

3) Thepromotion

should

not

be

launched

as

itwouldlowerthenetprofit.

22


23/102

Activity1

IllustrativeIntegratedQuestion

CostProfit

Volume

Analysis

23


24/102

Question(1)

Amanufacturingcompanyproducesandsellsa

singleproduct.

The

accountant

has

just

prepared

the

companysbudgetforthecomingyear.The

budgeteddataisextractedasfollows:

24

Salesvolume 90,000

units

Fixedcosts $440,000

Variablecostsperunit $10

Loss $80,000


25/102

Question(2)

Thedirectorsaredissatisfiedwiththebudgetedlossandsuggestproposalsforimprovement.

DirectorAsuggestsspending$50,000onadvertisingtoincreasesales.Hewishestoachieveatargetprofit

of

$100,000. DirectorBsuggestsreducingsellingpriceby$1per

unittoincreasesales.Heexpectsthatthesales

volume

would

increase

by

80%. DirectorCsuggestsbuyingamoreefficientmachine

whichwouldreduceunitvariablecostsby50%.The

usefullife

of

the

machine

is

1year.25


26/102

Question(3)

Required

a) ForDirector

As

proposal,

what

is

the

percentage

increaseinsalesrequiredtoachievethetarget

profit?

b)ForDirector

Bs

proposal,

what

would

be

the

profit

orloss?

c) ForDirectorCsproposal,whatwouldbethe

maximumcost

of

the

machine

for

breakeven?

26


27/102

Answers

a) 50%b) Profit$46,000

c) $370,000

27


28/102

ByGraph

Breakeven

Chart

28

0

Activity (Sales units)

Sales revenue/Costs

Totalcos

tsVariablecosts

Fixedcosts

Profit

Loss

ProfitSales

Fixedcosts

Break-evenpoint


29/102

ByGroup

Contribution

Graph

29

0

Totalcos

ts

Profit

Loss

ProfitSal

es

Co

ntribution

Activity (Sales units)

Sales revenue/Costs

Break-even point

Fixedcosts

Variab

lecosts


30/102

ByGraph

Profit

Volume

Graph

30

0

Profit / Loss ($000)

Loss

Profit

Break-evenpoint

Fixed

costs

Profit

Contributio

n

Activity(Salesunits)


31/102

BreakevenPoint

for

Sales

Mix

Whenacompany

produces

multiple

products,

it

isassumedthattherelativecombinationofthe

productssold(salesunits)willbeconstant.

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32/102

Illustration3

BreakevenPoint

for

Sales

Mix

Product XandProductYaresoldinsalesmixof3:1.

Details

about

the

two

products

are:

The fixedcostis$30,000.

Whatisthebreakevenpointinunitsanddollars?

32

ProductX ProductY

Sellingpriceperunit $5 $10

Variablecostperunit $4 $3

Unitcontribution $1 $7


33/102

Illustration3

BreakevenPoint

for

Sales

Mix

Since1standardbatchconsistsof3unitsofproductX

and1unit

of

product

Y,

the

breakeven

point

is

9,000

unitsofproductXand3,000unitsofproductY.

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34/102

Breakevenpoint(in$)

34

Sales $

ProductX:9,000x$5 45,000

ProductY:

3,000

x$10 30,000

Breakevenpoint 75,000

Illustration3

BreakevenPoint

for

Sales

Mix


35/102

Alternatively,thebreakevenpointin$canbe

calculatedby

using

the

contribution

margin

ratio:

Contributioninstandardsalesmix

=$1x3+$7x1=$10

Sellingpriceinstandardsalesmix

=$5

x3=$10

x1=$25

35

Illustration3

BreakevenPoint

for

Sales

Mix


36/102

Hence,thecontributionmarginratiois

Thebreakeven

point

in

$is

36

Illustration3

BreakevenPoint

for

Sales

Mix


37/102

Continuewithillustration3.Asthemarketing

managerobserves

that

Product

Yis

more

profitable,heisconsideringspending

additional$5,000onmarketingcampaignto

boostthe

sales

of

Product

Y.

It

is

estimated

thatsalesvolumeofProductYcanbe

increasedby1/3.

HowmanyunitsofProductXshouldbesoldatleastinordertoachievebreakeven?

37

Illustration4

Effectof

Change

in

Expenses

on

Sales

Mix


38/102

$

Originalfixed

cost 30,000

Marketingexpenses 5,000

ContributionfromProductY($7x3,000x4/3) (28,000)

Uncoveredfixedcost 7,000

38

Illustration4

Effectof

Change

in

Expenses

on

Sales

Mix

Hence, number of units of Product X to be sold forachieving breakeven =


39/102

Assumptionsof

CV

PAnalysis

Sellingpriceperunitandvariablecostperunitare

constant.

Fixedcostperperiodisconstant.

Productionunits

equal

sales

units.

Asingleproductissoldorthesalesmix isconstant.

39


40/102

Limitationsof

CV

P

Analysis

Unitsellingpricemayvary,e.g.duetobulk

discountsoffered

to

customers.

Unitvariablecostsperunitmayvary,e.g.due

to

economies

of

scales

or

overtime

premium

etc.

Fixedcostsmaychangeatdifferentlevelsof

activity,e.g.

step

costs,

i.e.

in

different

relevantranges,thefixedcostwillvary.

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41/102

CostClassification&Items

41


42/102

42


43/102

RelevantCost

vs.

Irrelevant

Cost

RelevantCostRelevantCost

Costthat

will

be

changedbya

decision

Costthat

will

be

changedbya

decision

IrrelevantCostIrrelevantCost

Costthat

will

not

be

changedbya

decision

Costthat

will

not

be

changedbya

decision

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44/102

Relevant

CostsIncrementalCostIncrementalCost

Additionalcost

which

willbespecifically

incurredbecauseofa

decision

Additionalcost

which

willbespecifically

incurredbecauseofa

decision

OpportunityCostOpportunityCost

Benefitwhich

will

be

forgonewhenthe

choiceofonecourseof

actionrequires

an

alternativecourseof

action

be

given

up

Benefitwhich

will

be

forgonewhenthe

choiceofonecourseof

actionrequires

an

alternativecourseof

action

be

given

up

44


45/102

IrrelevantCost

SunkCostSunkCost

Costof

aresource

alreadyacquiredand

areunaffectedby

choicebetween

alternatives

Costof

aresource

alreadyacquiredand

areunaffectedby

choicebetween

alternatives

CommittedCostCommittedCost

Costwhich

has

been

committedalthoughit

hasnotbeenincurred

orpaid.

Costwhich

has

been

committedalthoughit

hasnotbeenincurred

orpaid.

45


46/102

MaterialCost:

HowRelevant?

46


47/102

Illustration5

MaterialCost:

How

Relevant?

Ajobrequires1,000unitsofmaterialXwhich

havealready

been

in

the

inventory.

Theywerepurchasedatacostof$8perunit.

Thematerialscanbesoldatanetrealizablevalueof$12perunit.

Itcanalsobeusedinanotherjobassubstitute

for1,500

units

of

material

Yof

which

the

currentpurchasingpriceis$10.

47

ll


48/102

Illustration5

RelevantCost

for

Material

X

48

Analysis:TheoriginalpurchasepriceofmaterialXis

irrelevantsinceitisa

sunkcost

Theopportunity

cost

wouldbethehigherof

NRVorCostingSavings,

i.e.$15,000

Therefore,the

relevant

costofmaterialXis

$15,000

Analysis:TheoriginalpurchasepriceofmaterialXis

irrelevantsinceitisa

sunkcost

Theopportunity

cost

wouldbethehigherof

NRVorCostingSavings,

i.e.$15,000

Therefore,the

relevant

costofmaterialXis

$15,000


49/102

Labour Cost:

HowRelevant?

49


50/102

Illustration6

Labour Cost:HowRelevant?

A company has been offered a special order

whichrequires1,000directskilled labour hoursat $400 per hour. Because of full capacity and

limited

supply,

the

direct

skilled

labour hourshavetobedivertedfromexistingproductionof

500unitsofProductXwhichgivescontribution

of$300

per

unit.

50


51/102

Illustration6

Labour Cost:HowRelevant?

Relevant

Costs

forDirect

Labour$

Incremental

Cost

($400

x

1,000) 400,000ContributionLost($300x500) 150,000

550,000

51


52/102

ShortTermBusinessDecisions

52


53/102

FactorstoConsiderinBusiness

DecisionMaking

Quantitativefactors:

cost

vs.

benefit

analysis

inmonetaryterms.

Qualitative

factors:

social

responsibility,

corporategoodwill,employeemoraleetc.

53

Concentratethisinthiscourse


54/102

54

Acceptor

Reject

anOrderata

SpecialPrice


55/102

55

Acceptor

Reject

anOrderata

SpecialPrice


56/102

56

AcceptorRejectanOrderata

SpecialPrice

Illustration7


57/102

Accept

or

Reject

an

Order

at

a

Special

PriceAfirmcurrentlymakes50,000unitsofproductper

annumandsellsat$30each.Theoperating

statementis

as

follows:

57

$

Sales(50,000x$30) 1,500,000

Less: Materials (500,000)

Labour (680,000)

Contribution 320,000Less:FixedCosts (200,000)

NetProfit 120,000

Illustration 7


58/102

Illustration7

Acceptor

Reject

an

Order

at

aSpecial

Price

Acustomeroffersanorderfor10,000unitsat

selling

price

of

$28

each.Iftheorderisaccepted:

Fixedcostwouldincreaseto$250,000.

Extralabour would

be

required

at

overtime

premiumof20%.

4%

discount

would

be

obtained

for

all

materials.

58

Illustration 7


59/102

Illustration7

Acceptor

Reject

an

Order

at

aSpecial

Price

CostBenefitAnalysisforAccepting $

IncrementalBenefits

Increasein

sales

revenue

(10,000

x$28) 280,000

Savingsinmaterialcostforexistingproduction(500,000x4%) 20,000

300,000

Incremental Costs

Materialcostforadditionalproduction($500,000/50,000x10,000x96%) 96,000

Labour costforadditionalproduction($680,000/50,000x10,000x120%) 163,200

Increasein

fixed

cost

($250,000

$200,000) 50,000

309,200

Decreaseinnetprofit 9,20059

Illustration 7


60/102

Illustration7

Acceptor

Reject

an

Oder

at

aSpecial

Price

Conclusion:

As

the

incremental

benefit

is

less

thantheincrementcost,theordershouldbe

rejected.

60


61/102

61

HireorNotHire


62/102

62

HireorNotHire


63/102

63

HireorNotHire

Illustration8


64/102

Hireor

Not

Hire

Acompanycurrentlyproduced1,000unitsof

product

X

per

month

at

unit

variable

costs

of

$50.

ProductXwassoldat$120perunit.

Thecompany

is

considering

hiring

an

additionalmachinewhichcanreducetheunit

variable

costs

to

$48

and

increase

production

by20%.

Themonthlyhirechargeis$200,000.64

Illustration8


65/102

Hireor

Not

Hire

CostBenefitAnalysisforHiring $

Savingsinvariablecostsforexistingproduction

[($50$48)

x1,000] 2,000

Increaseincontributionfromadditionalproduction

[($120$48)x(1,000x20%)] 14,400

Increasein

contribution 16,400

Less:Hirecharge 20,000

Decreaseinprofit 3,600

65

Illustration 8


66/102

Illustration8

Hireor

Not

Hire

Conclusion:

Since

hiring

would

lead

to

a

decreaseinprofit,itshouldnotbehired.

66


67/102

67

MakeorBuy


68/102

68

MakeorBuy


69/102

69

MakeorBuy

Illustration9


70/102

Makeor

Buy

Acompanyrequires800unitsofcomponentXspecificallyforasingleorderandisconsideringmakingthecomponents

itselfor

buying

them

from

outside

supplier.

Inmaking,itrequires$3,000materials,100labour hours athourlyrateof$28tobedivertedfromotherteamswhichare

idle

but

cannot

be

fired

because

of

the

employment

contract. Ifthecompanymakesthecomponentsitself,theexisting

productionofproductYwillfallby100units.ProductY

providesacontributionof$8perunit.

Thecomponentsaresoldatamultipleof1,000unitsat$4,500per1,000units.Anyexcessofthedemandcanbere

soldatapriceof$1perunit.

70

Illustration9


71/102

Makeor

Buy

RelevantCostforMaking $

Materials

3,000Contributionlost ($8x100) 800

TotalRelevant

Cost 3,800

71

Since the labour is idle, the cost is irrelevant.

Illustration9


72/102

Makeor

Buy

RelevantCostforBuying $

Purchasecost 4,500

Resaleofexcess[(1,000800)x$1] (200)

TotalNet

Relevant

Cost 4,300

72

Illustration9


73/102

Makeor

Buy

Conclusion:Since

the

relevant

cost

for

making

islowerthanthatofbuying,thecomponents

shouldbemade.

73


74/102

74

Retainor

Replace

Equipment


75/102

75

Retainor

Replace

Equipment


76/102

76

Retainor

Replace

Equipment

Illustration10


77/102

Retainor

Replace

Equipment

Acompanyisconsideringreplacinganoldmachine

withanewone.Detailsabouttheoldmachineandthe

newmachine

are

as

follows:

77

OldMachine

OriginalCost $1,000,000

Depreciatedamount $800,000

Remainingusefullife 3years

Currentdisposal

value $10,000

Disposalvalueafter3years Nil

Illustration10


78/102

Retainor

Replace

Equipment

NewMachine

Currentpurchase

cost $300,000

Usefullife 3years

Disposalvalue

after

3years $60,000

78

The new machine can reduce operating costs

by $80,000 per annum.

Illustration10


79/102

Retainor

Replace

Equipment

CostBenefitAnalysisforReplacement $

Incremental

Benefits

of

ReplacementTotal costssaving(3x$80,000) 240,000

Disposalvalueofnewmachineafter3years 60,000

Currentdisposal

value

of

old

machine 10,000

310,000

Less: Incremental Costs

Purchasecost

of

new

machine (300,000)

NetIncrementalBenefitsofReplacement 10,000

79

Note: Time value of money is ignored.

Illustration10


80/102

Retainor

Replace

Equipment

Conclusion:

Since

replacement

would

make

a

netincrementalbenefit,itshouldbereplaced.

80


81/102

81

SellorProcess

Further


82/102

82

SellorProcess

Further


83/102

83

SellorProcess

Further

Illustration11


84/102

Sellor

Process

Further

Acompanyisconsideringwhethertoprocessasemifinishedproductwhichhasbeenproducedattotal

variablecost

of

$60,000

and

can

be

sold

at

$100,000.

Ifthesemifinishedproductisfurtherprocessedtomakeitafinishedproduct,itcanbesoldat

$220,000.The

costs

involved

in

the

process

are

as

follows:

84

$

Directmaterials 150,000

Directlabour 10,000

Overheads 180,000

Illustration11


85/102

Sellor

Process

Further

Contracthasbeensignedforthepurchaseofthe$150,000materials.Thematerialsareforspecial

purposeand

cannot

be

used

in

another

alternative.

Ifitisnotused,itcanbesoldat$30,000.

Overheadsinclude$70,000specifictofurtherprocess

and

allocated

general

overheads

of

$110,000.

Thefinishedproductafterthefurtherprocesscanbesoldat$220,000.

85

Illustration11


86/102

Sellor

Process

Further

$

IncrementalBenefitsfromFurtherProcessing

Increasein

sales

revenue

($220,000

$100,000) 120,000

RelevantCoststoCompletion

Directmaterials 30,000

Directlabour 10,000

Overheads 70,000

110,000

NetIncrementalBenefits 10,000

86

Illustration11


87/102

Sellor

Process

Further

Conclusion:

Since

the

benefit

of

further

processingisgreaterthanthecosts,further

processingisrecommended.

87

Eli i t


88/102

88

Eliminate orRetain an

Unprofitable

Segment

Eli i t


89/102

89


Unprofitable

Segment

Eli i t


90/102

90


Unprofitable

Segment

Illustration12

Eli i t R t i U fit bl S t


91/102

Eliminateor

Retain

an

Unprofitable

Segment

ACompanyhastwodepartmentsproducingproductsX

andYrespectively.Thebudgetedoperatingstatement

forthe

coming

year

is

summarized

as

follows:

Ofthetotalcost70%isvariable,10%isspecificfixed

and20%isgeneralfixed.91

ProductX ProductY

$ $

Sales 60,000 100,000

Less:TotalCost 70,000 80,000

NetProfit

/(Loss) (10,000) 20,000

Illustration12

Eli i t R t i U fit bl S t


92/102

Eliminateor

Retain

an

Unprofitable

Segment

ContributionIncomeStatement ProductX ProductY Total

$ $ $

Sales 60,000 100,000 160,000

Less:Variablecost(70%oftotalcost) 49,000 56,000 105,000

Contribution 11,000 46,000 55,000

Less:Specific

fixed

cost

(10%

of

total

cost) 7,000 8,000 15,000

4,000 36,000 40,000

Less:Generalfixedcost(20%of$150,000) 30,000

Netprofit 10,000

92

Illustration12

Eliminate or Retain an Unprofitable Se ment


93/102

Eliminateor

Retain

an

Unprofitable

Segment

Conclusion:Sincethedepartmentproducing

productXmakes

contribution,

it

should

be

retained.Ifitiseliminated,theprofitwillbe

only$6,000insteadof$10,000.

93


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Activity2

IntegratedIllustrativeQuestion

94

Q ti (1)


95/102

Question(1)

Amanufacturingcompanyhasbeenaskedtoquotefor

aoneoffjobwhichwouldrequirethefollowing

resources:

MaterialA

1,000kgwouldberequired.Thematerialisused

regularlyinotherjobs.Currentlythereare4,000kgin

theinventorywhichwaspurchasedat$8perkg.Itcan

besoldat$7ifnotused.Thecurrentreplacementcost

is$9

per

kg.

95

Question (2)


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Question(2)

MaterialBorMaterialC

100kgwouldberequired.MaterialBisnotinthe

inventoryand

has

to

be

ordered

at

acurrent

price

of

$15perkg.However,materialCcanbeusedto

substitutematerialB.MaterialCisininventoryandhas

beenpurchased

at

acost

of

$20

per

kg.

It

was

specificallypurchasedforuseinaproductlinewhich

hasnowbeendiscontinued.Itcanbesoldatanet

realizablevalue

of

$8

per

kg.

If

it

is

used

to

substitute

materialB,additionalconversioncostof$6perkghas

tobeincurred.96

Question (3)


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Question(3)

Skilledlabour

Directskilledlabour costforthejobwouldbe$40,000.

Skilledlabour is

in

short

supply.

If

the

workers

work

for

thisjob,theycannotworkforanotherjobwhichwould

makeatotalcontributionof$5,000.

97

Question (4)


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Question(4)

Unskilledlabour

Unskilledlabour receivingpaytotaling$16,000willbe

transferredfrom

another

department

which

will

recruit

additionallabour atatotalcostof$17,000including

payandrecruitmentcosts.

98

Question (5)


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Question(5)

Machinehours

50machinehourswouldberequired.Amachine

currentlylying

idle

will

be

used

in

the

job.

Details

about

themachineryareasfollows:

Ifthe

machine

is

not

used,

the

machine

hours

can

be

hiredfromaleasingcompanywhichcharges$1,000

perhour.

99

Depreciationduetouse $10,000

Currentnetrealizationvalue $240,000

Estimatednetrealizablevalueafteruse $200,000

Question (6)


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Question(6)

Required

Calculate

the

minimum

price

that

should

be

quotedforthejob.

100

Answer


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AnswerRelevantCosts $

MaterialA 9,000

MaterialC 1,400

Skilled

labour 45,000Unskilledlabour 17,000

Machine

hours 40,000112,400

101

Further Readings


102/102

FurtherReadings

Burgstahler,D.,Horngren,C.,Schatzberg,J.,Stratton,W.,&Sundem,

G.(2008).IntroductiontoManagementAccounting,14thed.UpperSaddleRiver:PrenticeHall.Chapters2&56.

Drury,C.(2008).ManagementandCostAccounting,7thed.London:SouthWesternCengage Learning.Chapters89&1112.

Horngren,C.T.,Datar,S.M.,Foster,G.,Raian,M.&Ittner,C.(2009).

CostAccounting:AManagerialEmphasis,13thed.UpperSaddleRiver:PrenticeHall.Chapters3&11.

Lucey,T.(2009).Costing,7thed.London:SouthWesternCengage

Learning.Chapters17&2021.102

costing for decision making_teupdate_final

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