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Solution Relevant Costing

The company is currently operating at 80% capacity. Management must decide whether to accept a large export order that would utilize half of remaining capacity. Accepting the order would require operating at either 100% or 130% capacity through overtime or new equipment. A profitability statement compares the options of only domestic sales at 80% capacity, a mix of domestic and export sales at 100% capacity, or a mix at 130% capacity through increased fixed costs and overtime pay. Management must select the most profitable alternative.

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Utsav Choudhury
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224 views9 pages

Solution Relevant Costing

The company is currently operating at 80% capacity. Management must decide whether to accept a large export order that would utilize half of remaining capacity. Accepting the order would require operating at either 100% or 130% capacity through overtime or new equipment. A profitability statement compares the options of only domestic sales at 80% capacity, a mix of domestic and export sales at 100% capacity, or a mix at 130% capacity through increased fixed costs and overtime pay. Management must select the most profitable alternative.

Uploaded by

Utsav Choudhury
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Relevant Costing

Home work
A company currently operating at 80 % capacity has the following particulars: Sales 3200000 Direct Material 1000000 Direct Labour 400000 Variable Overhead 200000 Fixed Overhead 1300000

Cont..
An export order has been received that would utilise half the capacity of the factory. The order cannot be split i.e it has either to be taken in full and executed at 10 % below the normal domestic prices or rejected totally.

Cont..

1.

2.

The alternatives available to the management are: Reject the order and continue with the domestic sales only(as at present),or Accept the order, split capacity between overseas and domestic sales and turn away excess domestic demand,

Cont..
3.Increase capacity to accept the export order and maintain the present domestic sales by: a) buying an equipment that will increase capacity by 10%. This will result in an increase of Rs. 1,00,000 in fixed costs, and b)work overtime to meet balance of required capacity. In that Case, labour will be paid at one and a half times the normal wage rate. Prepare a comparitive statement of profitability and suggest the best alternative.

Profitability Statement
I II

III 80% capacity for domestic sales 50% capacity for domestic and 50 % Present position 80% sales and 50 % capacity for capacity for Domestic sales only export export Particulars Sales(domestic) Sales(export) Total Sales Less:-Variable Cost 80 % (Rs.) 3200000 3200000 100% (Rs) 2000000 1800000 3800000 130 % (Rs) 3200000 1800000 5000000

Material Labour
Overhead Total

10000000 400000
200000 1600000

1250000 500000
250000 2000000

1625000 700000
325000 2650000

Working Notes
1.Sales at 80% capacity Rs. 3200000 at 100%=3200000 x 100/80=4000000 2.Domestic Sales at 50% capacity=2000000 3.Sales(export) at 50% capacity=2000000-10% =Rs.1800000

Direct Material
Direct material cost for alternative II(100% capacity) =1000000 x 100/80=Rs. 1250000 Direct material cost for alternative III (130 % capacity) =1000000 x 130/80=1625000

Labour Cost
Labour cost for alternative II At 100 %=400000 x 100/80=500000 Labour cost for alternative III At 130 %=(400000 x 110/80 ) +(400000 x 20/80 x 3/2) =550000 + 150000= 700000

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