Management Accounting Assignment Playdough Company

Added on - 12 Nov 2019

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Running head: MANAGEMENT ACCOUNTINGManagement AccountingStudent’s NameCourse Code
1MANAGEMENT ACCOUNTINGThe Playdough company currently produces 760,000 playdough canisters per year at its localplant as it sells the product in canisters. The details of the costs in producing the canistersare:Direct materials $ 300,000Direct labour 12000 hrs at $15 per hr 180,000Variable overhead $10 per direct labour hr 120,000Fixed overhead $45 per direct labour hr 540,000Total cost $ 1,140,000The Playdough company has received an offer from the Cannister company to supply thecannisters at $1 per canister. The only fixed overhead that would be avoided would be$80,000 of supervisors salaries and $28,000 machinery depreciation. The remaining fixedoverhead would continue to be incurred.The Playdough company currently sell their canisters for $2.20 per canister.Question Number A:Calculate the cost per unit of producing the canisters under the traditional approach.ParticularsFiguresTotal production (Per Year) Units760000Direct materials$ 3,00,000.00Direct labour 12000 hrs at $15 per hr$1,80,000.00Variable overhead $10 per direct labour hr$1,20,000.00Fixed overhead $45 per direct labour hr$5,40,000.00Total Cost$11,40,000.00Per Unit cost under traditional approach$ 1.50Calculation of cost per unit of producing (Traditional approach) = (Total cost/ Number ofunits produced)Per unit cost= (Total production in units = 7, 60,000/ Total Cost = $11, 40,000) = $1.50
2MANAGEMENT ACCOUNTINGQuestion Number B:Should the company purchase the canisters or continue manufacturing them? ShowworkingsParticularsFiguresTotal production (Per Year) Units760000Direct materials$ 3,00,000.00Direct labour 12000 hrs at $15 per hr$ 1,80,000.00Variable overhead $10 per direct labour hr$ 1,20,000.00Fixed overhead (540000-80000-28000)$ 4,32,000.00Total Cost$ 10,32,000.00Per Unit cost after avoiding (Supervisor's salary and Depreciation)$ 1.36Offered Price of the Canister's company$ 1.00Here, in the above table we can see that Company Playdough is able to manufacturethe Canister $1.36 per unit whereas another company is offering the same product in lesserprice $ 1 per unit. So if playdough will go for the manufacturing decision, they have to bear $0.36 more cost for each unit. On the other hand, if they are going with the purchase decisionthen only $ 1 per unit required to bear. Also company earned per unit profit will be more. Ascompany Playdough has plan to sell each product @ $ 2.20, so total profit per unit will be$1.20 (If they are going with purchase decision) else profit per unit will be $0.84respectively.Company playdough will decided to go for the purchase option which is more profitable.
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