Costing Techniques Solution

This document provides solutions to a costing techniques assignment. It covers various aspects of cost accounting, including cost apportionment, what-if analysis for risk evaluation, marginal costing, break-even point calculations, and profitability analysis. The solutions demonstrate the application of different costing methods and techniques to real-world business scenarios. The document includes detailed calculations, explanations, and references to relevant literature. It's a valuable resource for students studying cost accounting and business development.

COSTING TECHNIQUES
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Table of Contents
1.(a)..................................................................................................................................................3
1. (b).................................................................................................................................................3
2. (a).................................................................................................................................................3
2(b)...................................................................................................................................................3
2(c)...................................................................................................................................................4
2(d)...................................................................................................................................................5
3.......................................................................................................................................................5
4.......................................................................................................................................................5
REFERENCES.....................................................................................................................................7
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1.(a)
Particulars Total Basis for apportionment
Supervision salaries 42000 Number of employees
Canteen costs 1200 Number of employees
Factory rates 7000 Floor areas in m2
Insurance 930 Number of insurance claims
Machinery maintenance 2800 Number of maintenance cards
Energy supply 7550 Electricity in KWH
Factory building maintenance 875 Factory floor area
1. (b)
Particulars Total
Basis for
apportionment
Fabrication
department
Finishing
department Total
Supervision salaries 42000 Number of employees 28000 14000 42000
Canteen costs 1200 Number of employees 800 400 1200
Factory rates 7000 Floor areas in m2 5000 2000 7000
Insurance 930
Number of insurance
claims 620 310 930
Machinery maintenance 2800
Number of maintenance
cards 2000 800 2800
Energy supply 7550 Electricity in KWH 6040 1510 7550
Factory building
maintenance 875 Factory floor area 625 250 875
Total 43085 19270 62355
2. (a)
What-If analysis may not be considered as an appropriate technique for risk evaluation
because it is very expensive for the company to build a simulation model. Moreover, it is too
difficult also to interpret the results of the model and it requires excellent technical & analytical
skills (Sandborn, 2017).
2(b)
Explanation of the activities: Car production unit can face risk due to the following activities:
1. Failure in production line
2. Machinery failure
3. Incorrect manufacturing process
4. Utility failure i.e. power shortage
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5. Shortage of material in market
6. Delay in material purchase
7. Incorrect estimation of required production
Area of interest
1. Maximize profitability
2. Timely production
3. Reduction in consumer waiting time
4. Customer satisfaction
Sub-systems
1. Machinery
2. Control unit
3. Mechanical compression system
4. Lubrication
5. Others
2(c)
What If
Immediate
consequence
Ultimate
consequence Recommendations
Subsystems
Failure in
production line
Delay in
production Decline in sales Proper technical failure
Machinery
Machinery
failure
Delay in
production
Consumer
dissatisfaction Machinery shortage
Machinery,
Mechanical
compression
system
Incorrect
manufacturing
process
Production will
be affected
Goods quality will
be adversely
affected
Proper managerial
planning
Mechanical
compression
system
Utility failure
i.e. power
shortage
Shortage of
production
Decline in sales and
profitability electricity shortage
Lubrication
Shortage of
material in
market
Production
shortage
Less sales and
decline customer
base
contract with suppliers Control unit
Mechanical
compression
system
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Delay in
material
purchase Less production Decline turnover contract with suppliers
Contracts with the
suppliers
Incorrect
estimation
High cost and
less production Less sales Proper planning
Planning
2(d)
If there is only a single supplier, than car manufacturing firm can search alternative
opportunities like either it may decide to produce units in their own manufacturing unit. However, it
may contract with the overseas suppliers where there is enough quantity of quality material
available at cheaper prices.
3.
(i) Marginal costing (MC) refers to the change in total cost of the goods that will be arise due to the
production of one additional unit, henceforth, it considers only the variable cost. The main purpose
of it is to examine the cost-volume-profit relationship (BEP, PVR, contribution, profit etc.) for
decisions-making purpose i.e resource allocation, greater return & so forth (Najjar, Stricklan and
Kaplan, 2016).
(ii) MC technique is not suitable for the high capital investment firms like mines, automobile
sector, construction & others where companies invest huge quantum of fixed capital which cannot
be ignored.
4.
Total sales revenue = selling price*price per generator
= 850*£350
= £297,500
Calculation of profitability
Particulars Formula Results
Sales 850*350 297500
Less: variable cost 850*200 170000
Contribution 127500
Less; fixed cost 60000
Total profitability 67500
Break-even point: It is the point where total revenue of the business comes equal to the
total expenditures, called break-even point (BEP) (Laviana and et.al., 2016). It is the point of
optimum utilization of the resources, it is necessary for the firm to sell their units atleast to the BEP
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point, otherwise, firm will incur loss.
BEP (Units) – Total fixed cost/Contribution per unit
Contribution = selling – variable cost
BEP units – 60000/(350-200)
= 60000/150
= 400 units
BEP (in GBP) = BEP units *selling price
= 400 * 350
= 140,000
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REFERENCES
Books and Journals
Laviana, A.A. and et.al., 2016. Utilizing time‐driven activity‐based costing to understand the short‐
and long‐term costs of treating localized, low‐risk prostate cancer.Cancer. 122(3) pp.447-
455.
Najjar, P.A., Strickland, M. and Kaplan, R.S., 2016. Time-Driven Activity-Based Costing for
Surgical Episodes. JAMA surgery.
Sandborn, P., 2017. Activity-Based Costing (ABC). In Cost Analysis of Electronic Systems. 14(2).
pp. 77-92.
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