MANAGING FINANCIAL Managing Financial Resources and Decisions

Managing Financial Resources and Decisions

Task 3)

 

January

Sales Budget

Quantity

Unit Price

Total Value

Product A

1000

100.00 100,000.00

Product B

2000

120.00 240,000.00

Total Quantity and value

3000

 

340000

Production Budget

January

 

Product A

Product B

Total

Budgeted Sales Units 1,000.00 2,000.00 3,000.00 + Planning Ending Units 1,100.00 1,650.00 2,750.00

- Beginning Units 1,000.00 1,500.00 2,500.00

Planned Production in Units 1,100.00 2,150.00 3,250.00

Material usage in quantities

January

 

Product A

Product B

Total

Production Units

11000

2150

3250

+ Planning Ending Units

31200

24000

55200

- Beginning Units

26000

20000

46000

Material usage in quantities

16200

6150

12450

Material purchases in quantity and value

January

 

Product A

Product B

Total

Production Units

11000

2150

3250

Raw materials needed per case (pounds)

4

6

10

Production needs (pounds)

44000

12900

56900

Add desired ending inventory of raw material

31200

24000

55200

 

x4

x6

 

 

124800

144000

 

Total needs

168800

156900

325700

Less beginning inventory of raw materials

26000

20000

46000

 

x4

x6

 

 

104000

120000

 

Raw materials to be purchased

64800

36900

101700

Sales of the product A in January is 100000 while product B is 240000 in term of value. However, the production cost of product A is 64800, while product B is 36900. If we compare both of the material cost and the production cost, product A is consuming more cost than product B. with this figures it is beneficial for the company to go for product B as their cost is lower and profit is higher.

Unit Cost Under Absorption Costing

 

Direct Materials Cost per Unit

$6.00

Direct wages Cost Per Unit

$4.00

Variable Manufacturing Cost Per unit

$2.00

Fixed Manufacturing Overhead Per unit (20000/10000)

$2.00

Total Cost Per Unit

$14.00

Unit Cost Under Variable Costing

 

Direct Materials Cost per Unit

$6.00

Direct Labour Cost Per Unit

$4.00

Variable Manufacturing Cost Per unit

$2.00

Total Variable Cost Per Unit

$12.00

Income Statement

Absorption Costing Income 

Sales (9600*20)

 

192000

Cost of Goods Sold

 

 

Beginning Inventory (10000*14)

0

 

Cost of Goods Manufactured

140000

 

Goods Available for Sale

140000

 

Ending Inventory (10000-9600)

5600

 

Cost of Goods Sold

 

134400

Gross Profit

 

57600

Income Statement

Variable Costing Format

Sales (9600*20)

 

192000

Cost of Goods Sold

 

 

Beginning Inventory (10000*14)

0

 

Cost of Goods Manufactured

120000

 

Goods Available for Sale

120000

 

Ending Inventory (10000-9600)

4800

 

Cost of Goods Sold

 

115200

Variable Cost of Goods Sold

 

76800

Fixed Manufacturing Overhead

 

20,000

Net income

 

56,800

Price Decisions with Absorption and/or Marginal Costing

In order to make price decisions with Absorption and/or Marginal Costing, it is important to understand the concept of these two terms and the cost assed to it and the importance of them.

Marginal Costing: A method of inventory costing in which all direct production costs (direct materials and direct labour) and indirect manufacturing costs are included as variables inventoried, excluding the fixed manufacturing overhead costs, since they are considered as the period in which costs are incurred (www.fao.org).

Absorption Costing: It is an inventory costing method, in which all direct production costs and all indirect manufacturing costs both fixed and variable costs are considered to be inventoried, thus considering the fixed manufacturing overhead as a cost Product.

The differences between the two costing methods focus on the accounting treatment given to the fixed costs of production. To determine the cost of production, costing absorbent considered direct materials, direct labour and indirect manufacturing costs, regardless of whether such items have fixed or variable characteristics in relation to production volume. So, advocates of this method argue that production cannot be done without incurring the fixed manufacturing overhead costs.

 By contrast, the direct cost to determine the cost of production excludes the fixed costs of production and only considers the ...