The following are the unit costs of making and selling an item at a volume of 30,000 units per month (which represents the company's capacity): Manufacturing: Direct Materials P 6 Direct Labor 12 Variable Overhead 2 Fixed Overhead 4 Selling and administrative: Variable 8 Fixed 10 Assume the company has 300 units left over from last year which have small defects. These units will have to be sold at a reduced price as scrap or thrown away. This would have no effect on the company's other sales. The variable selling and administrative costs would have to be incurred to sell the defective units. Required:
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
The following are the unit costs of making and selling an item at a volume of 30,000 units per month (which represents the company's capacity):
Manufacturing:
Direct Materials P 6
Direct Labor 12
Variable Overhead 2
Fixed Overhead 4
Selling and administrative:
Variable 8
Fixed 10
Assume the company has 300 units left over from last year which have small defects. These units will have to be sold at a reduced price as scrap or thrown away. This would have no effect on the company's other sales. The variable selling and administrative costs would have to be incurred to sell the defective units.
Required:
Prepare a Differential Cost Analysis (Refer to Slide 13 of Lecture) then justify which decision is more favorable.
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