120,000 The company is concerned about the loss on products F2. It is considering ceasing production of it and switching the spare capacity of 100,000 units to product F3. You are told: All
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Q5): ABC Ltd makes three products and reviewing the profitability of its product line. You are given following budgeted data about firm for coming Year.
Products F1 F2 F3
Sales (in Units 000) 120 100 80
Revenue (RS. in 0000) 144 150 88
Costs: Rs.)
Material 480,000 500,000 240,000
Labor 320,000 400,000 160,000
14000,000 1550,000 760,000
The company is concerned about the loss on products F2. It is considering ceasing production of it and switching the spare capacity of 100,000 units to product F3.
You are told:
- All production is sold.
- 75% of the labor cost for each product variable in nature.
- Fixed administration overheads Rs.900, 000 in total have been apportioned to each product on the basis of Units sold and are included in overhead costs above. All other overhead costs are variable in nature.
- Ceasing production of product F2 would eliminate the fixed labor charge associated with it and one-sixth of fixed administration overhead apportioned to Product F2.
- Increasing the production F3 by 100,000 units would mean that fixed labor cost associated with product F3 would double, the variable labor cost would rise by 20% and its selling price would have to be decreased by Rs. 1.50 in order to achieve the increased sales.
Required:
- Prepare marginal cost statement for a unit of each product on the basis of:
- The original budget:
- If product F2 is deleted.
- Prepare a statement showing total contribution and profit of each product group on the basis of:
- The original budget:
- If product F2 is deleted.
Using result (a) and (b) advice whether product F2 should be deleted from product range, giving reasons for your decisions.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
