Cost Apportionment

MAC A MAC B

IW 78,560.00 8,586.00 9,190.00

CONS 16,900.00 6,400.00 8,700.00
RENT 16,700.00 3,711.00 4,453.00
BUILDING 2,400.00 533.00 640.00
POWER 8,600.00 4,730.00 3,440.00
HEAT 3,400.00 756.00 907.00
DEP 40,200.00 20,100.00 17,900.00
166,760.00 44,816.00 45,230.00
Reallocate 7,600.00 5,890.00
Reallocate 4,752.00 11,880.00
166,760.00 57,168.00 63,000.00

value of mach 402000 201000 179000

Power usage 100 55 40
direct lab 35000 8000 6200
mach usage 25200 7200 18000
area 45000 10000 12000

Ovehead Obsorption rate

7.94 3.50

Actual exp 176,533.00

Overhead ab
Mac a 57962
MAC B 65,450.00
Assembly 49,056.00 172468

Under obsorption 4,065.00

17000
180000
over 10000
Marginal Costing valued at variable production cost

variable cost 4
sales 6
fixed 2000

Absorption costing

the absorption rate for fixed production overheads

full absorbed cost per unit

Period 1

Sales 7200
Production cost
Variable -6000
Fixed -1500
7500
Add: open inv 0
Less: clg inv -1500
Prod. Cost of sales 6000
Under Absorbed oh
Total cost 6000

Gross Profit 1200

Less: Other cost -500
Net Profit 700

Marginal Costing cost per unit

Sales 7200
Variable prod cost -6000
Add: op inv 0
Less closing inv -1200

variable cost of sales 4800

Contribution 2400
Fixed cost -2000
 Profit 400

Q2)
Marginal costing
31.03.03

Sales 980000
variable prod cost 416500
Opn Inventory
Less : Clg Inv -73500
343000

637000

Variable selling cost 196000

441000

Fixed cost 160000

selling 90000

250000

Net Profit 191000

Absorption Costing

Sales 980000
Opening inv -
std cost 586500
Closing inv -103500
483000
over/under obsp -10000

473000

Gross Profit 507000

selling and so on cost 196000

variable 90000

221000
6.4 SP 10
VC 4
FPC 50000

a) Absorption costing

SP 80000
Production cost
variable 60000
fixed 75000
135000
Less: Cl Inv 63000

Less: over obsorption 25000

47000

33000

b) Marginal Costing

SP 80000
VC - 15000*4 60000
Less: Closing Inv 28000

32000

Gross Profit 48000

Fixed cost 50000
Loss -2000

The difference in profits of $35000 is explained by the differenc

opening inv greater than clg inv

ASSEMBLY CANTEEN MAINTANENANCE Basis of apportionment

15,674.00 29,650.00 15,460.00 Actual

1,200.00 600.00 - Actual
5,567.00 2,227.00 742.00 Area
800.00 320.00 107.00 Area
258.00 - 172.00 power usage
1,133.00 453.00 151.00 Area
2,200.00 val of mach
26,832.00 33,250.00 16,632.00
19,760.00 -33250 direct lab
0 -16632 Machine usage
46,592.00 - -

22000
3- 2
20800
- - -
15000 6000 2000

2.24
production overheads 1
5

Period 2 Total

10200

-5600
-1400
7000
-1500

8500
100
8600

1600
-500
1100

10200
-5600
1200

6800

3400
-2000
 1400

30.09.03 open inv

prod
1120000 SALES
343000
73500
-24500
392000

728000

224000
504000

160000
90000

250000

254000

1120000
103500
483000
-34500
552000
20000

572000

548000

224000
90000

234000
 per U
per U

15000
8000 U -8000
7000

8000*10
15000*4
7000*4

5000 is explained by the difference is the increase in inventory values

MC shows bigger profit

2
31.03.03 30.09.03
0 1500
8500 7000
-7000 -8000
1500 500

under/over obsorption

31.03.03 30.03.03

Normal output 8000 8000

Budgeted ouput 8500 7000
500 1000
std fixed prod oh 20 20
10000 20000
 ABC Costing

2.1 ABC Vs Tradition Absorption costing

a) Tradition absorption costing

w x y
Materialcost 200 800 2000
Direct labour 50 150 500
Overheads 700 2100 7000
950 3050 9500
Units producted 10 10 100
cost per unit 95 305 95

absorption rate is based on direct labour hrs/machine hrs 70

b) ABC

w x y
Materialcost 200 800 2000
Direct labour 50 150 500
Short run cost 70 210 700
Setup cost 1560 1560 3900
scheduling cost 1300 1300 3250
material handling cost 1100 1100 2750

4280 5120 13100

Units producted 10 10 100
cost per unit 428 512 131

workings

7 per machine run

780 per production run
650 per production run
550 per production run

summary
Product Trad. Cost ABC Difference
 w 95 428 333
x 305 512 207
y 95 131 36
z 305 215 -90

800 1286 486

2.2 a) Traditional Absorption costing

L M
Direct Labour 5000 14000

OAR
Overhead absorpred 15 30

b) ABC approach

L M
15000 7000

22000

Using ABC , cost absorped according to cost driver

machine activity 10
production run set up 400
handling orders 600

L M
Machine cost 150000 70000
set up cost 4000 16000
order handling cost 9000 36000
163000 122000

units produced 5000 7000

Over head cost/ unit 32.6 17.42857

z Total
8000 11000
1500 2200
21000 30800
30500 44000
100
305 10
30
100
300

30800/440 hrs

z Total
8000 11000
1500 2200
2100 3080
3900 10920
3250 9100
2750 7700

21500 44000
100
215

Diff in total
 3330
2070
3000
-9000

15 285000/19000
Target costing

Most Effective in designing stage

Less effective for established products.

3.1 Target selling Price 17950

Profit required 1436
Target cost 16514

3.2 Target selling price 60

Profit margin 18
Target cost 42
Projected cost 45.89

Closing - Target Cost Gap

Estimated cost - Target cost

DM -3.21
DL -24.03
DMC -1.12
Ordering -0.23
quality ass -4.6
Marketing -8.15
Distribution -3.25
after SS -1.3
-45.89
Life Cycle costing

Stages

Development Maturity
Introduction decline
Growth

When life cycle is short, estimates of life cycle cost and revenues are likely to be easie
Life cycle cost will be easier to monitor
venues are likely to be easier.
Throughput Accounting

Supports production management system which aims to maximise throughput and therefo
Not concerned with traditional measurement of profits or mazimisation of profits.
JIT is operated with some buffer Inventory kept only when there is bottleneck resource.

Theory of Constraints
optimising production performance
Key financial concept is to turn material into sales therby maximising net cash generated f

Througput Sales - Material cost

In Throughput accounting, all operational expenses are assumed to be fixed cost.

Theory of constraints

1) Identify the constraints

2) decide how to exploit the constraint in order to maximise the profit
3) subordinate and synchronise everything else to the decisions made in step 2
4) Elevatre the performance of constraint
5) If the constraint has shifted during any of the above steps , go back to step 1 and neve

Overall aim of TOC is to maximise throughput and keeping operational cost and investme

Example 1.7)

Machine X process 100kg raw material per hr

Machine y process 800 kg raw material per hr
of an input of 900 kg, 100 kg of processed material must wait on the bottleneck machine (

Desired output 8100 kg

machine use 9 hrs

Backlog 900 (8100-(9x800))

Throughput accounting

It is an approach to production management which aims to maximise sales revenue less m

Inventory and operation expenses.

It is based on following concepts , all derived from TOC

Concept 1
In the short run, all the cost in the factory as fixed costs.
Fixed cost includes direct labour cost.
cost is called toal factory cost

Concept 2
In JIT environment, ideal inventory level is zero.
Products should not be made unless customer ordered them
work in progress should be valued at material cost only
Untill output is sold, no value will be added and no profit earned untill sales takes place

Concept 3
Profitablility is determied based on sales

Throughput return per factory hour sales - direct material cost

Usage of bottleneck resource in h

Limiting Factor Analysis

3.1 Example

Step 1 Determine the bottleneck resource

Machine - Bottleneck resource

Step 2 Calculate throughput per unit for each product

Prod A Prod B Prod C

Sales 2.8 1.6 2.4

Mat cost -1.2 -0.6 -1.2
1.6 1 1.2

Step 3 Calculate throughput per unit of limiting factors

Mach hr/unit 3.2 5 4

Step 4 rank the products

3 1 2

Step 5 Allocate resouces to arrive at optimum production plan

Product Units Bottleneck Total hrs
resource hrs/unit

B 4000 0.2 800

C 5000 0.3 1500
2300

A (balance) 3400 0.5 1700

4000

9000

12400

Throughput accounting ratio

ratio of the throughput per unit of bottleneck resource to the factory cost per u

Throughput accounting ratio Throughput per unit of bottleneck

Factory cost per unit of bottlenec

Throughput per unit of bottleneck resource Total factory cost

Total units of bottleneck resource

Total throughput should exceed total factory cost otherwise the organisation wi

4.2 Example

a) Profit per day Throughput contribution - operating cost

1065000
Op Cost -720000
345000

b) TA ratio for each product

factory cost per unit 90000

Product TP/ Factory hr T.A

X 84000 0.9333333333
Y 135000 1.5
Z 120000 1.3333333333

Question

bottleneck - 8 hrs/ day

selling price 100
Material cost 40

a) total profit per day 216000

-144000
72000

b) Return per factory hr 30000 100-40/1/500

Through put ratio 1.6666666667

18000

Summary

Supports production management which aims to maximise throughput and JIT

kept only when there is a bottleneck resource.

Priority given to products generate maximum throughput

100
100
200
1166
mise throughput and therefore cash generation from sale
misation of profits.
e is bottleneck resource.

mising net cash generated from sale.

ed to be fixed cost.

s made in step 2

go back to step 1 and never allow any new constraint

erational cost and investment cost to minimum

on the bottleneck machine (Machine Y)

ximise sales revenue less material cost,while also reducing

d untill sales takes place

- direct material cost

of bottleneck resource in hours
 Throughput per hr Total
Throughput

5 4000
4 6000

3.2 5440
15440

Less: Direct lab

cost per week -10880

Profits/ week 4560

ce to the factory cost per unit

ghput per unit of bottleneck resources

y cost per unit of bottleneck resource

actory cost
units of bottleneck resources

herwise the organisation will make a loss

- operating cost
 Sales-Direct material cost/ usage of bottleneck resources in hours

0.002

aximise throughput and JIT is operated with some buffer inventory

600 2000
350
700000
1166.667
Cost Volume profit

study of interrelationships between cost , volume an d profits.

Contribution = unit selling price - unit variable cost

profit = (sales volume x contribution per unit)-fixed cost
break even = activity level at which there is neither profit nor loss
total fixed costs contribution required to breakeven
contribution per unit contribution per unit

CS ratio profit/volume ratio total contribution/ sales revenue or unit contribution/selli

sales revenue at breakeven point = fixed costs /cs ratio

Margin of safety (in units) = budgeted sales units- breakeven sales units
MOS in % = Budgeted sales - breakeven sales x100
budgeted sales

sales volume to achieve a target profit = fixed cost+ target profit

Contribution per unit

Assumptions

Can apply to only one product or to more than one product , if they have fixed sale mix
Fixed cost per period are same in total and unit variable cost are constant amount at all levels
sales prices are constant at all levels
production volume = sale volume

1.1.3 Example

SP 12 per unit
VC 9 per unit
FC 240000

B.Sales 90000 units

Contribution 3
Profit 30000

Break even point in units of sales 80000

CS ratio 0.25

Break even in sales 960000

MOS 11.111111

achieve profit 360000

sales 120000 Units

Break even point for multiple products

step 1: calculate contribution per unit and weighted average contribution per unit
step2: calculate breakeven point in units. Fixed cost / weighted average
step 3: calculate breakeven point in sales revenue.

Question

Step 1: Contribution per unit

Beta Gamma Delta

SP 135 165 220

VC -72.8 -57.9 -146.2
Contribut 62.2 107.1 73.8

Contribution from beta 186.6

contribution from gamma 428.4
contribution from delta 369
contribution from 12 units 984

weighted average contribution 82

Step 2: breakeven point in units.

12500 units Fixedcost/weighted average contribution

Step3: break even points in sale revenue

total revenue
Beta 3125 421875
gamma 4166.66667 687500
delta 5208.33333 1145833.333

total 2255208.33
CS ratio for Multiple products

Step1 : contribution per unit

M N
Rev 7 15
vc 2.94 4.4

Contribution 4.06 10.6

m 20.3
n 10.6

30.9 total contribution/total sales revenue

0.618

Step 2: Break even point

200000 in sales revenue

Step 3: Break even sales for each products 35

7
M 140000 20000 units
N 60000 4000 units'

Question

Step1
0.4545035

Step 2 Break even point

2255208 Fixed cost/weighted average contribution per unit

Step 3: Brek even sales for each products

Beta 563802.08 405 0.187066975 421875

Gamma 751736.11 660 0.304849885 687500
Delta 939670.14 1100 0.508083141 1145833

2255208 2165

Question
two Products MK and KL

Sell 1MK for every 2KL

Sales rev 150000
fc 30000
mk cs ratio 20%
KL cs ratio 40%

0.33333333

Break even FC/ CS RATIO

90000

Points
Any change in the proposition of products in sales mix will change the contribution per mix
and the weighted cs ratio . This will change the break even point.

a) If the mix shifts towards products with lower contribution margin, the breakeven point will
increase and profits will fall unless there is a corresponding increase in total revenue

b) A shift towards products with higher contribution margins without a corresponding decrease i
revenue will cause an increase in profits and lowered breakeven point.

c) If sales are at the specified level but not in the specified mix, there will be either a profit or a
depending on whether the mix shifts towards products with higher or lower contribution margins

Margin of safety for multiple products

Budgeted sales in the standard mix - breakeven sales in standard mix

6.1 Example

Step 1: calculate weighted average contribution per unit

W R
SP 8 14
VC -3.8 -4.3

Contribution 4.2 9.7

Contribtuion 21 58.2 79.2

 Weighted average contribution 7.2

Step 2: Break even point in terms of number of shares

Fixed cost/weighted average contribution

11550 units

Step 3: Calculate the breakeven point in terms of no of units of products

W 5250 units
R 6300 units

Step 4 : Calculate the breakeven point in terms of revenue

W 42000
R 88200
130200

Step 5: Calculate margin of safety

budgeted sales - breakeven sales

19840 in the standard sales mix

As percentage
13.2231405

Target Profit for multiple products

Fixed csot + target profit

At breakeven point - no profit

i.e Contribution = Fixed cost

So Total contribtuion = Fixed cost + Required profit

Total no of unites to be sold to achieve a target profit is calculates as = (Fixed cost+Required pro

7.2 Example

Step 1: werighted average contribution per unit

22 15 19
-16 -12 -13
 6 3 6

Contribution 12 3 18

Total 33

Weighted average contribution 5.5

Step 2: Calculate required no of sales units

24000 units

Step 3: Calculate required sales in terms of no of units of products and sales revenue

F G H
Units 8000 4000 12000
SP 22 15 19
Sales rev 176000 60000 228000 464000

Using CS Ratio

Step 1: calculate revenue per mix

F 44
G 15
H 57
116

Step 2: Calculate contribution per mix

33
Step 3: weighted average cs ratio

total contribution/ Total sales revenue

28.45

Step 4: Calculate required total revenue

464000

Step 4: Required sales from each product

F 0.3793103 176000
G 0.1293103 60000
H 0.4913793 228000

464000
enue or unit contribution/selling price

y have fixed sale mix

constant amount at all levels of output and sales
bution per unit
xed cost / weighted average contribution per unit

contribution
 15
3

140000

per unit

563802.1
the contribution per mix

n, the breakeven point will

e in total revenue

ut a corresponding decrease in

ere will be either a profit or a loss

or lower contribution margins.
as = (Fixed cost+Required profit)/Weighted average contribution per unit
and sales revenue
Limiting Factor

Identifying limiting factor

calculate contribution per unit
calculate contribution per unit of limiting factor
Contribution per unit/ units of scarce resource used
rank the products
concentrate production on those products with highest contribution per unit of limiting factor.

eg1 Limiting factor analysis

A B C

Contribution 16 10 24
Kilios of i 4 2 8

Contribution 4 5 3
per kilo

Rank 2 1 3

12000/2 6000 unit of B

Maximum
contribution 6000*10 60000

Sales restrictions

B - Restricted to 4000 units

4000*2 8000 B
1000*4 4000 A
12000

Therefore maximum contribution

A 16000
B 40000
56000

Shadow Price
term applied to limited resource

Make or Buy

Method: To decide which products shoule be made and which should be brought
calculate the savings per unit of scarce.

Buy in price - Variable cost to make

No of units of scarce resource used per unit

Example 3
X Y Z
Units rqd 2000 2500 4000
No of Kgs 3 2 1

1 2.5 2
3 1 2

Comments:
Firm should initially make Y'S and then make as much as Z's

Utilization of B

2500*2 5000 Y
3000*! 3000 Z
8000

2000 x and 1000 y to be brought

Multi- Limiting factors

Linear Programming

Iso contribution method

Simultaneous equation method

3x+4y=4800
2x+6y=4800

to be continued later
unit of limiting factor.
 Pricing

Cost based pricing approach

Full Cost plus pricing total cost+ mark-up

Marginal cost plus pricing total cost+ mark-up
Return on Investment Pricing Budgeted full cost +(target ROI % X capital employed

Example 1

Production cost 2000000

variable cost 1200000
Fixed production cost 300000
Non Fixed production cost 100000

Sales level 40000

Full cost plus 20%

Marginal cost 40%
Target ROI 10%

IF actual sales - 20,000 units, SP set cost plus 20%

Full cost plus

(i) Variable cost 30 sales

Fixed cost 10 vc
Total cost 40 Fixed cost
Net Profit
20% mark up 8 /loss
Selling price 48

Marginal cost

(ii) Variable cost 30

40% mark up 12
SP 42

Target ROI
(iii) building and equipment 2000000
Working Captial 400000
capital employed 2400000

profit required 240000

VC 30
FC 10
Profit 6
SP 46

Opportunity cost Pricing

Short term pricing method

Standard steel 14025 1500*9.35

Speciality steel 1000 500*2
Less: Delivery cost -1000
Unskilled labour 2660 380*7
semi skilled labour 0
skilled labour - Direct Labour 918 51*18
- Opporturnity cost 3060 51*60
Use of equipment 8000
Fibrillator 8000
Ecotex -3000
33663
Mark up - 25% 8415.75
Bid Price 42079

Economist Model
Demand curve

P=A-BQ

B=CHANGE IN PRICE/ CHANGE IN QUANTITY

A - Price
q- Quantity

OPTIMAL PRICING C.P DEMAND

15 300
14.5 400

3.333333 33.33333

10
capital employed

20,000 Units

960000
-600000
-400000
-40000
workings
Opportunity cost for skilled labour
Each half an hour of skilled labour used on the contract results in on

Lost revenue 96
Direct lab -15
skilled lab -9
semi skilled lab -27
variable ohs -15
30
Units hr 2
60

400
15

6.4
1500
contract results in one last unit of production
Budgeting

Top down Prepared by senior management

Bottom up Manager participate in the budget preparations
Rolling budget continously updated
Zero based budgeting starts from scratch
Activity based budgeting supports activity based costing
Incremental Prepared based on previous budget or actual
performance with incremental amounts
added in the new budget
Feed forward control

Flexed budget buget recalculated at actual activity levels