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SUMMARY
Cost information is necessary for making certain decisions. A relevant cost is one
which is pertinent to the decision under consideration. Those costs which would remain
unaffected whether a decision is made or not are irrelevant costs. Thus variable costs are
relevant costs as they always change with a change in a decision. All fixed costs may not
change due to a decision; they are irrelevant costs. Relevant costs include the concepts of
differential cost and marginal cost. Differential cost is the difference of costs of two or more
alternatives. In cost accounting, marginal cost is treated equivalent to variable cost since, in
the short run, fixed costs are assumed to remain constant. Contribution is the difference
between sales and variable cost.
Relevant cost approach, particularly the marginal cost analysis, helps in making a
number of short-term decisions. It helps in determining prices of product under special
situations like one time export order, and in deciding whether a product should be dropped,
or whether the firm should make a component or buy it from outside, or whether the firm
should sell an intermediate product or process it further, or whether a plant should be shut-
downetic. Generally, if an alternative yield positive or higher contribution, it would be
adopted by the firm.
ILLUSTRATIVE PROBLEMS
PROBLEM 1
The S.K. Company manufactures and sells three products A,B, and C. The data for them are
given below:
Product
A B C
Fixed costs are allocated on the basis of number of units produced. The plant is operated on
full capacity. Each unit requires same manufacturing time.
Product A is unprofitable. The firm proposes to drop it. The loss per unit of Product A is
calculated as follows by the accountant:
SOLUTION
1. Product A should not be dropped since it generates positive contribution:
Rs 18 Rs 16 = Rs 2 per unit. The profit would decrease by Rs 20,000 (i.e., 10,000
units x Rs 2) if Product A is dropped.
2. If more units or Product B could be sold, Product A should be dropped since Product
B yields a higher contribution per unit: Rs 10 Rs 6 = Rs 4 per unit. Net increase in
profits will be 10,000 x Rs 4 Rs 10,000 x Rs 2 = Rs 20,000.
3. The selling price of Product A will have to be increased to Rs 20 to give contribution
per unit equal to that of Product B (viz. Rs 4).
4. The sales managers reasoning is invalid. Total fixed costs will not change if Product
D is added. Fixed cost per unit is not relevant in making the decision. The
contribution from Product D will be : (Rs 16 Rs 15.50) x 24,000 units = Rs 12,000,
while contribution from Product A is Rs 20,000. Thus profit will decrease by Rs 8,000
if Product D is added and Product A is dropped.
PROBLEM 2
The Raisilly Manufacturing Company manufactures a component which is finally assembled
to its main product. The component is produced in two manufacturing steps. The normal
annual production of the part is 50,000 units.
The following are the standard costs of performing the manufacturing steps:
Manufacturing step 2 :
Direct labour Rs 73,600
Variable overhead 44,800
Other overhead 44,160
Total cost Rs 1,62,560
SOLUTION
Fixed general overhead of Rs 36,000 are irrelevant in the present decision-making.
Differential costs of purchasing parts and perfoming manufacturing step 1 should be
compared:
Differential costs of manufacturing step 1:
Direct materials Rs 82,800
Direct labour 1,10,400
Variable overhead 55,200
Variable general overhead (10% of Rs 1,10,400) 11,040
Rs 2,59,440
PROBLEM 3
The board of directors of Eskay Company, manufacturing three Products A,B and C wants
your advice on the companys production mix.
The following information is available:
Product
A B C
SOLUTION
1. (a) Profit on current production
Product
A B C Total
Units 1,000 5,000 6,000 21,000
Sales Rs 5,00,000 Rs 3,40,000 Rs 5,40,000 Rs 13,80,000
Variable costs:
Direct materials Rs 1,00,000 Rs 1,50,000 Rs 1,20,000 Rs 3,70,000
Direct wages:
Dept. 1 1,40,000 40,000 90,000 2,70,000
2 50,000 30,000 60,000 1,40,000
3 80,000 20,000 90,000 1,90,000
Overhead 30,000 10,000 30,000 70,000
Total variable costs Rs 4,00,000 2,50,000 3,90,000 10,40,000
Contribution Rs 1,00,000 Rs 90,000 Rs 1,50,000 Rs 3,40,000
Fixed overhead 2,00,000
Net profit Rs 1,40,000
Contribution ratio
to limiting factor
(i.e. wages of Dept. 2) 200% 300% 250%
Product
A B C Total
Units 1,600 7,000 9,000 17,000
Sales Rs 80,000 Rs 4,76,000 Rs 8,10,000 Rs 13,66,000
Variable costs:
Direct materials Rs 16,000 Rs 2,10,000 Rs 1,80,000 Rs 4,06,000
Direct wages:
Dept. 1 22,400 56,000 1,35,000 2,13,400
2 8,000 42,000 90,000 1,40,000
3 12,800 28,000 1,35,000 1,75,000
Overhead 4,800 14,000 45,000 63,000
Total variable costs Rs 64,000 3,50,000 5,85,000 9,99,000
Contribution Rs 16,000 Rs 1,26,000 Rs 2,25,000 Rs 3,67,000
Fixed overhead 2,00,000
Net profit Rs 1,67,000
2. The directors should ensure that reduction in the sales of Production A does not
damage the customers goodwill. The status of Product A vis-a-vis Products C and B
should be examined. If Product A is complementary to Products C and B, the fall in
As sales will tend to reduce sales of C and B.
Thus, in terms of limiting factor, B is the most profitable product, followed by
products C and A. Production hours, therefore, should be first concentrated to
Product B and C and the balance may be devoted to Product A. As per the current
production budgets, the total hours available at Dept. 2 are : A : 10,000 x 5 + B :
5,000 x 6 + C : 6,000 x 10 = 1,40,000 hours.
If the Company produces maximum units (expected to be sold of B and C), the
production hours will be allocated as follows:
Exhibit 1
PRODUCT DIVERSITY: PROPORTION OF CONSUMPTION
( 1 ) 20/50 (Nitro-X) and 30/50 (Nitro-Y)
( 2 ) 800/2,000 (Nitro-X) and 1,200/2,000 (Nitro-Y)
( 3 ) 5,000/30,000 (Nitro-X) and 25,000/30,000 (Nitro-Y)
( 4 ) 10,000/60,000 (Nitro-X) and 50,000/60,000 (Nitro-Y)
First-Stage Procedure
In the first stage of activity-based costing, overhead costs are divided into
homogeneous cost pools. A homogeneous cost pool is a collection of overhead costs for
which cost variations can be explained by a single cost driver. Overhead activities are
homogenous whenever they have the same consumption ratios for all products.
Once a cost pool is defined, the cost per unit of the cost driver is computed for that
pool. This is referred to as the pool rate. Computation of the pool rate completes the first
stage. Thus, the first stage produces two outcomes: (1) a set of homogeneous cost pools
and (2) a pool rate.
For example, in Exhibit 1, quality control costs and setup costs can be combined into
one homogeneous cost pool and maintenance and power costs into a second. For the first
cost pool, the number of production runs or inspection hours could be the cost driver. Since
the two cost drivers are perfectly correlated, they will assign the same amount of overhead
to both products. For the second pool, machine hours or kilowatt-hpurs could be selected as
the cost driver.
Assume for the purpose of illustration that the number of production runs and
machine hours are the cost driver chosen. Using data from Exhibit 2, the first-stage
outcomes are illustrated in Exhibit 3.
Second-Stage Procedure
In the second stage, the costs of each overhead pool are traced to products. This is done
using the pool rate computed in the first stage and the measure of the amount of resources
consumed by each product. This measure is simply the quantity of the cost driver used by
each product. In our example, that would be the number of production runs and machine
hours used by each product. Thus, the overhead assigned from each cost pool to each
product is computed as:
Pool 1
Setup costs $ 96,000
Quality control costs 74,000
Total costs $170,000
Production runs 50
Pool rate (cost per run) $170,000/50 $ 3,400
Pool 2
Power cost $ 84,000
Maintenance 78,000
Total costs $162,000
Machine hours 60,000
Pool rate (cost per machine hour)
$162,000/60,000 $ 2.70
From Exhibit 3, the rate for this pool is $3,400 per production run. From Exhibit 2, Nitro-X
uses 20 production runs. Thus, the overhead assigned from the first cost pool is $68,000
($3,400 x 20 runs). Similar assignments would be made for the other cost pool and for the
other product (for both cost pools).
The total overhead cost per unit of product is obtained by first tracing the overhead costs
from the pools to the individual products. This total is then divided by the number of units
produced. The result is the unit overhead cost. Adding the per-unit overhead cost to the
per-unit prime cost yields the manufacturing cost per unit. In Exhibit 4, the manufacturing is
computed using activity-based costing.
NOTE
Using only volume-based cost drivers can lead to one product subsidizing another. This
subsidy could create the appearance that one group of products is highly profitable and
could adversely impact the pricing and competitiveness of another group of products. In a
highly competitive environment, accurate cost information is critical to sound planning and
decision making.
Nitro-X
Overhead
Pool 1 : $3,400 x 20 $68,000
Pool 2 : $2.70 x 10,000 27,000
Total overhead costs $ 95,000
Prime costs 50,000
Total manufacturing costs $145,000
Units produced 10,000
Unit cost $ 14.50
Nitro-Y
Overhead
Pool 1 : $3,400 x 30 $102,000
Pool 2 : $2.70 x 50,000 135,000
Total overhead costs $237,000
Prime costs 250,000
Total manufacturing costs $487,000
Units produced 50,000
Unit cost $ 9.74
Conventional
Plantwide rate 10.53 10.53 Exhibit 6
Department rates 8.86 10.87 Exhibit 7
Activity-based cost $14.50 $9.74 Exhibit 1
Nitro-Y
Nitro-X
Nitro-Y
RINGKASAN
informasi biaya yang diperlukan untuk membuat keputusan tertentu. Sebuah biaya
yang relevan adalah salah satu yang berhubungan dengan keputusan yang
dipertimbangkan. Biaya-biaya yang akan tetap tidak terpengaruh apakah keputusan
dibuat atau tidak adalah biaya yang tidak relevan. Dengan demikian biaya variabel
adalah biaya relevan karena mereka selalu berubah dengan perubahan keputusan.
Semua biaya tetap tidak berubah karena keputusan; mereka biaya tidak relevan.
biaya relevan meliputi konsep biaya diferensial dan biaya marjinal. biaya diferensial
adalah perbedaan biaya dari dua atau lebih alternatif. Dalam akuntansi biaya, biaya
marjinal diperlakukan setara dengan biaya variabel karena, dalam jangka pendek,
biaya tetap diasumsikan tetap konstan. Kontribusi adalah perbedaan antara
penjualan dan biaya variabel.
pendekatan biaya yang relevan, khususnya analisis biaya marjinal, membantu dalam
membuat sejumlah keputusan jangka pendek. Ini membantu dalam menentukan
harga produk di bawah situasi khusus seperti rangka ekspor satu waktu, dan dalam
memutuskan apakah suatu produk harus turun, atau apakah perusahaan harus
membuat komponen atau membelinya dari luar, atau apakah perusahaan harus
menjual produk menengah atau memprosesnya lebih lanjut, atau apakah tanaman
harus ditutup-downetic. Umumnya, jika yield alternatif positif atau kontribusi yang
lebih tinggi, itu akan diadopsi oleh perusahaan.
MASALAH ILUSTRASI
MASALAH 1
The S.K. Perusahaan memproduksi dan menjual tiga produk -A, B, dan C. Data untuk
mereka diberikan di bawah ini:
biaya tetap dialokasikan atas dasar jumlah unit yang diproduksi. Tanaman ini
dioperasikan pada kapasitas penuh. Setiap unit membutuhkan waktu manufaktur
yang sama.
Produk A adalah tidak menguntungkan. Perusahaan mengusulkan untuk
menjatuhkannya. Hilangnya per unit Produk A dihitung sebagai berikut oleh akuntan:
(1) Haruskah Produk A akan turun?
(2) Haruskah Produk A akan turun jika lebih unit Produk B bisa dijual?
(3) Apa yang harus menjadi harga jual produk A untuk menjadikannya sebagai
menguntungkan sebagai Produk B?
(4) Asumsikan bahwa penjualan Produk B tidak dapat ditingkatkan saat Produk A
dijatuhkan. Namun, Produk D baru, dapat ditambahkan. harga jual produk D's dan
biaya variabel per unit diperkirakan Rs 16 dan Rs 15.50 masing-masing. Manajer
penjualan lebih memilih untuk menambahkan produk D karena dalam pendapatnya,
meskipun kontribusi dari Produk D kurang dari itu dari Produk A, lebih unit Produk D
dapat diproduksi dan dijual yang akan mengurangi biaya tetap per unit. Ia berpikir
bahwa 24.000 unit Produk D dapat dijual jika Produk A dijatuhkan. Anda diminta
untuk mengomentari pendapat manajer penjualan. Apa yang harus menjadi harga
jual produk D's jika harus keuntungan seperti Produk A? (Diadaptasi)
LARUTAN
1. Produk A tidak boleh dijatuhkan karena menghasilkan kontribusi positif:
Rs 18 - Rs 16 = Rs 2 per unit. keuntungan akan menurun Rs 20.000 (yaitu, 10.000 unit
x Rs 2) jika Produk A dijatuhkan.
2. Jika lebih unit atau Produk B bisa dijual, Produk A harus menurun sejak Produk B
menghasilkan kontribusi yang lebih tinggi per unit: Rs 10 - Rs 6 = Rs 4 per unit.
Kenaikan bersih keuntungan akan 10.000 x Rs 4 - Rs 10.000 x Rs 2 = Rs 20.000.
3. Harga jual produk A harus ditingkatkan untuk Rs 20 untuk memberikan kontribusi
per unit sama dengan Produk B (viz. Rs 4).
4. Alasannya penjualan manajer tidak valid. Total biaya tetap tidak akan berubah jika
Produk D ditambahkan. biaya tetap per unit tidak relevan dalam membuat
keputusan. Kontribusi dari produk D akan: (Rs 16 - Rs 15,50) x 24.000 unit = Rs
12.000, sedangkan kontribusi dari Produk A adalah Rs 20.000. Dengan demikian laba
akan menurun Rs 8.000 jika Produk D ditambahkan dan Produk A dijatuhkan