The Bright and Clear Cream Company produces four types of face cream viz.: Spot Cleanse, Dew Drops, Wrinkle Whacker and Line Out.

The creams are produced in a complex which consists of two production departments, through which each cream passes, and a general service department.

Unfortunately, due to inherent production problems, not all of the creams produced always satisfy quality control criteria for classification as superior quality; these sub-standard quality creams are sold at reduced prices.

Below are budgeted details relating to the year ending 30th June 19_5:

It is anticipated that all jars produced will be sold with 10% being of substandard quality.
The fixed overhead per annum will total £18 920 comprising £5 280 for Production Department 1, £10 560 for Production Department 2 and £3 080 for the General Service Department. The General Service Department fixed overhead is apportioned to the Production Departments on the basis of direct labour hours worked; total fixed production overhead is absorbed into product costs via a direct labour hour rate.
An analysis of the budgeted production schedule reveals the following spread of hours

Despite the fact that the details above have been extracted from the budgets for the forthcoming year, the management still feel uncertain about some of the assumptions upon which the forecasts have been made.
The management is also unsure of the policy to adopt regarding the sale of the sub-standard products.

Given these doubts and uncertainties, the management has requested that you:

(a) calculate the budgeted cost per jar of each product and the total budgeted profit for the year based on the assumption that the ¢
production/sales of sub-standard products are as budgeted.

(b) assuming that the details are as expected, comment on the proposals that Dew Drops should be discontinued as it may be unprofitable.
(Any surplus operating capacity arising will not be utilised.)

(c) discuss the relative merits of absorption and variable costing with particular reference to the case of Dew Drops.

Transcribed Image Text:

Cream: Detail SC DD WW LO Selling price per jar: Superior quality 2.96 4.36 2.34 2.96 Sub-standard quality 0.60 0.72 0.70 0.60 Production number of jars 3.000 2.000 6.000 4 000 Prime cost of production per jar 0.80 1.40 1.00 1.20