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Padhuka's - Students' Handbook on Strategic Cost Management & Performance Evaluation - CA Final Product C Particulars Product B Product A 20,000 Sales (Units) 25,000 10,000 85 75 40 Selling Price p.u.) 18 14 10 Direct Materials p. u. (*) 10 12 8 Direct Wages p.u. at 2 p.hr. 10 9 8 Variable Overhead p. u. () 20 Fixed Overhead ( )p.u. 16 18 27 Profit / Loss 22 -2 After the finalisation of the above manufacturing schedule, it is observed that presently only 80% capacity is being utilize by these three products. The production activities are made at the same platform and it may be inter changeable amon products according to requirement. In order to improve the profitability of the Company, the following three proposals ar put for consideration: (a) Discontinue Product A, and capacity released may be used for either product B or C or equally shared. The Fixed Cost Product A is avoidable. Expected chang in Materials Cost and Selling Price subject to the utilization of product A capacity are as under: Product B: Material Cost increased by 10% and Selling Price reduced by 2%. Product C: Material Cost increased by 5% and Selling Price reduced by 5%. (b) Discontinue Product A and divert the capacity so released and the idle capacity to produce a new Product D for meetim export demand whose per unit cost data are as follows: Selling Price 60 Direct Material 28 Direct Wages at 3 p.hr 12 Variable Overheads 6 Fixed Cost (Total) 31,05,500 (C) Products A, B and C are continuously run and hire out the idle capacity fixing a price in such a way that the same rate profit per Direct Labour Hour is obtained in the original budget estimates. Required: 1. Prepare a statement of profitability of products A, B and C in existing situation. 2. Evaluate the above proposals independently, & calculate the overall profitability of the Company under each proposal. 3. What proposal should be accepted, if the Company wants to maximize its profit? Solution: 1. Basic Computations Particulars B c (a) Direct Labour Cost per unit (given) 8 12 10 32 RS.2. 2 (b) Wage Rate per hour (given) (C) Direct Labour Hour required p.u. of product (a + b) 4 hrs 6 hrs 5 hrs (d) Budgeted Production and Sales (given) 10,000 units 25,000 units 20,000 units (e) Total Budgeted hrs (cx d) 40,000 hrs 1,50,000 hrs 1,00,000 hrs 2,90,000 ( Fixed OH p.u. (given) 7 16 18 20 (9) Budgeted Total Fixed OH (d * ) 1,60,000 4,50,000 34,00,000 10,10 Since present utilization is only 80%, Total Capacity (h) Total Capacity 2,90,000 hours = 3,62,500 hours. 80% 2. Profit Statement in Existing Situation Product A Product B 240 x 10,000 = 4,00,000 375 x 25,000= 18,75,000 Prode 385x20,000 = * 17,0 Particulars (a) Sales Value (b) Less: Variable Cost Direct Materials Direct Labour VOH 10 x 10,000 = 1,00,000 38 x 10,000 = 380,000 78 x 10,000 = 80,000 14 x 25,000 = 3,50,000 12 x 25,000 = 3,00,000 39x 25,000 = { 2,25,000 3 18 x 20,000 = 3 3,6 * 10 x 20,000 = 3 2,0 10 x 20,000 = 2,0 9.90 Product A 1,40,000 1,60,000 R20,000) d) FOH ed 15.40 CVP Analysis and Decision-Making Particulars Product B Product C c) contribution (a - b) 310,00,000 39,40,000 4,50,000 *4,00,000 e) Profit / Loss (c-d) 25,50,000 35,40,000 Total Profit * 10,70,000 3. Product A discontinued & Capacity utilised for B or Cor both. Situation I Fully used for B Particulars II Fully used for C III used equally for B and C B B 9 (a) Hours presently spent (WN le) 1,50,000 hrs 1,00,000 hrs eio 1,00,000 hrs 1,50,000 hrs mb) Hours of A, now re-allocated 40,000 hrs 40,000 hrs 20,000 hrs 20,000 hrs 1) Total Hours allocated 1,90,000 hrs 1,40,000 hrs 1,70,000 hrs 1,20,000 hrs (d) Hours required per unit (WN 1c) 6 hours 5 hours 6 hours 5 hours me) No. of units produced (cd) 31,667 units 28,000 units 28,334 units 24,000 units Selling Price p. u. 75 -2% = 73.50 85 -5% = 80.75 773.50 380.75 a) Less: Variable Cost p.u. Materials 14 + 10% = 15.40 18 + 5% = 18.90 18.90 Labour 12.00 10.00 12.00 10.00 VOH 9.00 10.00 9.00 10.00 Sub - Total 36.40 38.90 36.40 38.90 1) Contribution p.u. 37.10 41.85 37.10 41.85 D) Total Contribution (e x h) 3 11,74,846 11,71,800 10,51,191 310,04,400 10) Contribution from B or C From C (WN 2) From B (WN 2) Already considered in above = 39,40,000 ={10,00,000 (k) Total Contribution (i + j) 321,14,846 321,71,800 320,55,521 1) Fixed Costs (excluding A) 38,50,000 38,50,000 38,50,000 n) Profit 12,64,846 13,21,800 12,05,591 Note: It is assumed that the change in Sale Price and Material Cost applies for entire output, not just for additional output. 4. Product A-discontinued, its capacity & spare capacity utilised for D Particulars Result a) Capacity of Product A 40,000 hours TO) Present Idle Capacity (3,62,500 - 2,90,000 hours) 72,500 hours Total hours to be spent on Product D 1,12,500 hours 4 hours (d) Time required per unit of D based on Labour Cost = 12:33 e) No. of units to be produced (1,12,500 hrs = 4 hrs) 28,125 units 760 Selling Price p.u. 19) Variable Cost p.u. = (28 + 12 + 6) 714 1) Contribution p.u. (f-9) 4) Total Contribution from D (e xh) 3,93,750 19,40,000 10. Contribution from B & C (WN 2) ( 10,00,000+ 9,40,000) 23,33,750 3) Total Contribution for Company (i + 1) 4) Fixed Costs (B + C + D) (Total 10,10,000 (less) 1,60,000 A avoided + 1,05,500 for D) 29,55,500 13,78,250 (m) Profit (k-1) 10,70,000 = 33.6897 = Rate to be charged for Idle Capacity. 5. (a) Profit per hour as per Original Budget = 2,90,000 hours (b) Profit at full capacity of 3,62,500 hours = { 10,70,000 + (72,500 hours x 73.6897 ph) = 3 13,37,503 1. To maximise profit 13,78,250, the Company may discontinue Product A and divert the capacity so released and the idle capacity to produce a new Product D for meeting export demand. 346 9.91 Sales 480200 Todos Studies on Sotek Cost Management Performance Evaluation Carina M 18 Marginal Casting and Budgeting - Change in Product Mix, Costs and Prices k Limited manufactures three products D, E and Feach requiring uimitor Material, Labour and Protection Facilities. Trading results of the Company for the previous year ending 31 March are as under (Amounts in Particular Total D F E 38.50.000 12,60,000 30,20,000 13,90,000 Variable Cost Material 10.71.000 26,09,500 9,06.000 6.35.500 Labour 20.14,500 9.24.000 6,04,000 LAB 500 Overheads 7.09.200 2,91,900 15,14,300 Total Variable Cost 27.41.200 1403.900 19.93.200 61,38,300 Contribution 11.08.800 (13,000) 10.26,800 21.21,700 Less Fend Overheads 12,60,000 Profit 8,61,700 Product E, despite best efforts, does not show any good prospect to yield reasonable margins and it is not possible to raise its price so as to make it profitable. The Company has decided to discontinue its production wef. April of the forthcoming year. Products and Fhave good potential to grow and the market can easily absorb the increased production, The Company has decide to raise the production of Products D and F by diverting the 60% Labour of Product E to Product D and balance 40% to Product F. Following additional information is available for the forthcoming year beginning April: (A) Total Direct Wage Bill for the year would be at the same level as for the previous year ending 3*** March. Material Cost per unit will increase by 5%, however Variable OH per unit will remain same. Fixed OH would increase by 96,500. (B) Selling Price per unit of Product D will increase by 4% and of Product F by 5%. Required: 1. Prepare Budget for the forthcoming year beginning April in the format as detailed above. 2. Compare and analyse the Budget for the last two years highlighting main features. Show calculation to the nearest Rupee. 3. To advise the Management on comparative Contribution/Profitability if 60% Labour of Product E is transferred to Product Finstead of Product D as above and balance 40% to Product D instead of Product F. Show calculations up to three decimal points. Give detailed reasoning for your advice. Solution: Particulars (a) Sales Material Labour Overheads (b) Variable Cost (c) Contribution 1. Percentage Analysis of Products D and F (present and proposed) Product D Product F Amt Present % New % Amt Present % 38,50,000 100,009 100 + 4 = 104.00 30,20,000 100% 10,78,000 28.00% 28 + 5% = 29.40 9,06,000 30% 9,24,000 24.00% Same = 24.00 6,04,000 20% 7,39,200 19.20% Same = 19.20 4,83,200 16% 27,41,200 71.20% 72.60 19,93,200 66% 11,08,800 28.80% 31.40 10,26,800 34% 31.40 28.80% =30.19% 34% 104.00 New % 100 + 5 = 105.00 30 + 5% = 31.50 Same = 20.00 Same = 16.00 67.50 37.50 37.50 =35.71% 105.00 (d) PVR = (x-3) 2. Computation of Revised Sales and Material Costs for next year (Situation I: 60% and 40% for D and F) Particulars Product D Product F (a) Labour Cost diverted from E 4,86,500 x 60% = 2,91,900 4,86,500 x 40% = 1,94,600 2,91,900 1,94,600 (b) So, Extra Sales achieved = 12,16,250 = 9,73,000 24% 20% New Sales at Previous Prices 38,50,000 + 12,16,250 = 50,66,250 30,20,000+ 9,73,000 = 39,93,000 (d) Sales Price Increase 50,66,250 x 4%= 2,02,650 39,93,000 x 5%= 1,99,650 (e) Revised Sales at Increased Prices (c+d) 52,68,900 41,92,650 0 Material Cost based on New Sales 50,66,250 x 28% = 14, 18,550 39,93,000 x 30% = 11,97,900 (9) Material Price Increase = (5% 70,928 59,895 (ti) Revised Material Cost (+9) 14,89,478 12,57,795 9.92 CVP Analysis and Decision-Making 3. Budget for next year (Situation I: 60% and 40% diversion for D and Frespectively). Particulars Product D Product F Total Sales 52,68,900 41,92,650 94,61,550 Variable Cost: Material 14,89,478 12,57,795 27,47,273 Labour 9,24,000+2,91,900 = 12,15,900 6,04,000 +1,94,600 = 7,98,600 20,14,500 Variable OH 50,66,250 x 19.20%= 9,72,720 39,93,000 x 16%= 6,38,880 16,11,600 Total Variable Cost 36,78,098 26,95,275 63,73,373 Contribution 15,90,802 14,97,375 30,88,177 Fixed OH (12,60,000+ 96,500) 13,56,500 Profit 17,31,677 Note: Contribution Amts for D & F can be matched at 30.19% & 35.71% on revised Sales, as computed in WN 1 above. Less: 4. Comments and Observations on Actuals of Last Year and Budgets of Next Year Aspect Sales Increase Contribution Increase Profit Increase % 94,61,550 (-) 82,60,000 30,88,177 (-) 21,21,700 17,31,677 (-) 8,61,700 14.55% Change =100.96% =45.55% 82,60,000 21,21,700 8,61,700 Inspite of only 14.55% increase in Sales, there is an increase of 45.55% in Contribution, due to Total Labour Cost and VOH per unit remaining the same as in last year. Increase in Profit by 100.96% is attributed to Operating Leverage Effect, inspite of marginal increase in Fixed Costs. The Company's decision to discontinue "E" and use those Labour efforts for "D" and "F" is prima facie beneficial [Note: Product-wise % Comparison and Analysis of both years is given in WN 1 itself.] 5. Computation of Revised Sales and Material Costs for next year (Situation II: 40% and 60% for D and F) Particulars Product D Product F (a) Labour Cost diverted from E 4,86,500 x 40% = 1,94,600.000 4,86,500 60% = 2,91,900.00 1,94,600 2,91,900 (b) So, Extra Sales achieved 8,10,833.333 = 14,59,500.00 24% 20% (C) New Sales at Previous Prices 38,50,000 + 8,10,833.333 30,20,000 + 14,59,500 = 46,60,833.333 = 44,79,500.00 (d) Sales Price Increase 46,60,833.333 x 4% = 1,86,433.333 44,79,500 x 5% = 2,23,975.00 (e) Revised Sales at Incr. Price = (c + d) 48,47,266.667 47,03,475.00 () Material Cost based on New Sales 46,60,833.333 x 28% = 13,05,033.333 44,79,500 x 30% = 13,43,850.00 (9) Material Price Increase = ( x 5% 65,251.667 67,192.50 (h) Revised Material Cost (f+9) 13,70,285.000 14,11,042.50 6. Budget for next year (Situation II: 40% and 60% diversion for D and Frespectively) Particulars Product D Product F Total Sales 48,47,266.667 47,03,475.000 95,50,741.667 Variable Cost: Material 13,70,285.000 14,11,042.500 27,81,327.500 Labour 9,24,000 + 1,94,600=11,18,600.000 6,04,000 + 2,91,900 =8,95,900.000 20,14,500.000 Variable OH 46,60,833 x 19.20%= 8,94,880.000 44,79,500 16.00%= 7,16,720.000 16,11,600.000 Total Variable Cost 33,83,765.000 30,23,662.500 64,07,427.500 Contribution 14,63,501.667 16,79,812.500 31,43,314.167 Less: Fixed OH (12,60,000 + 96,500) 13,56,500.000 Profit 17,86,814.167 Note: Contribution Amts for D&F can be matched at 30.19% & 35.71% on revised Sales, as computed in WN 1 above. E 9.93