cost & mangement account ii

8/7/2019 Cost & Mangement Account II

1/34

Unit II

Differential Costing


2/34

Differential Costing

Differential cost is the change in cost whichmay result from adopting an alternativecourse of action in the level of activity whichmay change in fixed cost or variable cost.


3/34

Characteristics of Differential Costing

Differential cost analysisis not made within theaccounting records ratherit is made outside the

accounting records.Total differential cost areconsidered in differentialcost analysis. Cost perunit is not taken into

consideration.

Total differential revenuesare compared with totaldifferential cost beforeadvocating an alternative

course of action.The item of cost which donot change for thealternatives underdifferential costing.

Under differential costanalysis the differentialcosts are considered andnot cost per unit.


4/34

Uses and Applications

Accept or reject decision.Sell or further sell decision.

Continue or shut down decision.Extend or reduce capacity decisionPricing decision

Sales Mix


5/34

A) Accept or Reject decision(Practical)

A manufacturer is operating at 50% of its capacity dueto competition. The following are the details-

Raw material- Rs 6 per unit.

Direct Labour- Rs 4 per unit.Variable overhead- Rs 3 per unit.Fixed overhead- Rs 2 per unit.

Total-Rs 15.Output - 15000 units.Total cost - Rs 225000.Sales value - Rs 210000.Loss - Rs 15000.


6/34

Contd.

A foreign customer to buy 6000 unit at Rs13.50 per unit and the company does notknow whether to accept or reject as it issuffering losses at the current level. Advisewhat should be done?


7/34

Solution

Existing New Totallevel Order(15000) (6000) (21000)

Sales(A) 210000 81000 291000Variable CostRaw material 90000 36000 126000Labour 60000 24000 84000Variable Overhead 45000 18000 63000Total VC(B) 195000 78000 273000


8/34

Contd.

Contribution(A-B) 15000 3000 18000- FC 30000 - 30000

15000 3000 12000(loss) (profit) (loss)

The offer can be accepted as it is reducing the

loss by Rs 3000.


9/34

Practical-2

I took the order for 5000 at Rs 50 each because I getmore than the cost incurred to produce them saidthe Works Mgr and produced the following

Particulars B4 accepting order AfterRs accepting

the order

VC 250000 400000FC 750000 851000Total Cost 1000000 1251000


10/34

Contd.

Cost per unit 40 41.70

Analyze the figure and the decision taken.


11/34

Sell or Further processdecision(Practical)

A manufacturing co. is evaluating two possibleprocesses for the manufacturing of a component.The following data is made available-

Process X Process Yper unit per unit

Selling Price 20 20

VC 12 14Total Fixed cost 3000000 2100000Output Capacity in units 430000 500000


12/34

Contd.

Expected sales in unitin next 2 yrs 400000 400000

You are required to suggesta) Which process should be taken?b) Would you change your answer as given

above if you were informed that thecapacities of the two process as follows X=600000 units and Y= 500000 units? Why?Substantiate your answer.


13/34

Solution

Comparative Profitability StatementParticulars Process X Process y

a)SP per unit 20 20- VC per unit 12 14Contrn per unit 8 6

Total C in Rs 3200000 2400000- Total FC 3000000 2100000Profit 200000 300000


14/34

Contd.

If total capacityIs utilized and soldContribution 3440000 3000000

- Total FC 3000000 2100000Profit 440000 900000Commenta) Process y can be chosen as it gives higher profit

(if present capacity is utilized and sold).b) Process X can be chosen if its capacity is

increased i.e.


15/34

Contd.

Contribution at 600000 Process XUnit for X 4800000

- Fixed Cost 3000000Profit 1800000Contribution at 500000 Process YUnits 3000000- Fixed Cost 2100000Profit 900000


16/34

Continue or Shut Down Decision

A manufacturing company has three productline A, B and C. The company managementrequested an income statement by productline and received the followings-

A B C TotalSale 400000 100000 300000 800000

Less- Cost of goods sold 250000 60000 200000 510000Gross Profit 150000 40000 100000 290000Operating Exp. 130000 70000 80000 280000Net Profit/Loss 20000 -30000 20000 10000


17/34

Contd.

The Company President and principalshareholder argued that such an analysis ismisleading and he requested furtherinformation about the company s operatingexp. He was given the following details-

A B C Total

VariableOperating exp. 110000 30000 50000 190000Total Fxd OE 90000

280000


18/34

Contd.

You are requested to prepare an incomestatement showing the contribution by pdtcovering the company s fixed cost. Would yourecommend discontinuance of pdt. BSoln-Cost of goods sold is MC or VC.Particulars A B C Total

Sale(A) 400000 100000 300000 800000Variable/Marginal Cost 250000 60000 200000 510000Variable erating 110000 30000 50000 190000VC/MC(B) 360000 90000 250000 700000Contribution(A-B) 40000 10000 50000 100000Fixed 90000

10000


19/34

Comment

If pdt B is discontinued then Contribution isRs(100000-10000)= Rs 90000 and fixed cost isRs 90000. Therefore there will be no profit orloss.

If pdt b is continued it gives a profit of Rs10000(as per statement).

So it is advisable to continue B instead of discontinuance.


20/34

Extend or Reduce Capacity Decision

A company engaged in plantation activities has 200hectares of virgin land, which can be used ingrowing jointly or individual tea, coffee, and

cardamom. The yield per unit hectare of differentcrops and their selling price per kg are as under:-Particulars Yield(kg) Selling Price(Rs)Tea 2000 20Coffee 500 40Cardamom 100 250


21/34

Contd.

The relevant cost data are given below-VC/kg Tea Coffee Cardamom

Labor Chrg 8 10 120Packing chrgs 2 2 10Other Cost 4 1 20

Total 14 13 150


22/34

Contd.

Fixed Cost Per Annum RSCultivation & growing cost 1000000

Admin. Cost 200000Land Revenue 50000Repairs & Maintenance 250000

Other Cost 3000001800000


23/34

Contd.

The policy of the company is to produce and sell allkinds of commodities and the maximum andminimum are to be cultivated per commodity isas follows-

Commodity Max MinTea 160 120Coffee 50 30

Cardamom 30 10Calculate the most profitable pdt mix and maxprofit which can be achieved.


24/34

Solution

Soln-o o

S

ont i utionont i n on i l tot l ont i ution

K tot llot

ot l i l


25/34

Contd.

Total Contribution= Rs 2455000(Tea+Coffee+Cardamom)

- Fixed Cost = Rs 1800000Profit = Rs 655000


26/34

Pricing Decision

A television manufacturing company find that in1984 it cost them Rs 616000 to manufacture200 sets of TV which are sold at Rs 4000 each-

Cost was made up of RSMaterial 200000

Direct Wages 300000Factory Overhead 60000Office Overhead 56000


27/34

Contd.

For 1985 they estimated:-a) That each TV set will require material Rs 1000

and wages Rs 1500.

b) That the factory overhead expenses will bearthe same relation to the direct wages as in theprevious year.

c) The %age of office overhead exp on factory costwill be the same as in the previous yr.

Prepare a statement showing the profit they shouldmake per unit if they enhance the price of theTV by Rs 80.


28/34

Solution

Soln:-

Cost Particular 1984 unit cost 200 TV Amt 1985 per unit costMaterial 1000 200000 1000Direct Wages 1500 300000 1500Factory Overhead(20% of DW) 300 60000 300Office Overhead(10% of Factory C 280 56000 280Cost of production 3080 616000 3080Profit 920 184000 1000

Sales 4000 800000 4080

Profitability Statement


29/34

Contd.

Selling Price enhanced by Rs 80/-. ThereforePrice= Rs(920+80)= Rs 1000.

10% of Factory Cost=200000+300000+60000= 560000*10/100=

56000.

Therefore 56000/200= 280 each.


30/34

Sales MixFollowing information has been made available from the cost record of UnitedAutomobiles manufacturing-

Direct Material Rs Per UnitX 8Y 6

WagesX 24 hrs@ 25p/hrY 16 hrs@ 25p/hr

Variable OverheadX Rs 9Y Rs 6

Fixed Overhead Rs 750Selling Price

X Rs 25Y Rs 20


31/34


32/34

Solution

Marginal Cost Statement Per UnitProduct X Product Y

Direct Materials 8 6Direct Wages 6 4

Variable Overhea 9 6Marginal Cost 23 16Contribution 2 4Selling Price 25 20


33/34

Contd.

Selection of Sales AlternativeParticular X Y Totala) 250 units of X &250 units of YContribution 500 1000 1500

Fixed Cost 750Profit 750b) 400 units of Y onlyContribution Nill 1600 1600Fixed Cost 750Profit 850c) 400 units of X & 100

units of YContribution 800 400 1200Fixed Cost 750Profit 450d) 150 units of X &350 units of YContribution 300 1400 1700

Fixed Cost 750Profit 950


34/34

Contd.

As the fourth alternative of manufacturing 150units of X and 350 units of Y yields max profit,it is the best sales alternative and wouldtherefore be recommended for adoption.

cost & mangement account ii

Documents