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| Corporate practice bd |
What Is Relevant Cost?
Relevant cost is a cost management accounting tools or technique that choices the best two or more alternative cost in decision making. I mean a business may have two or more project some time they have to take decision about dropped the product line which are already lost project, being dropping the product line, the management have to consider which cost are relevant & which are non-relevant cost. By analyzing this cost with what are the management accounting tools or technique it is called relevant Cost.
For better relevant cost analysis, you must consider following cost-
01.Sun cost
02.Opportunity cost
03.Avoidable cost
04.UN-avoidable
05.Value added cost
06.Non value added cost
07.Re- appointment of existing fixed cost
08.Depreciation & Book value (notional cost)
09.Contribution margin Forgone (Given up) for the decision
10.Rental opportunity for unused floor place
11.Decrease or increase variable cost per decision
12.Fixed cost umps & down
13.Additional development cost
14. Shut down cost
15.Alternative resourcing cost
16.Incremental cost
17.Future cash flows
18.Committed Costs
The major relevant cost decisions are as follows-
01.Make or Buy decision
02. Continue Operating vs. Closing Business Units
03. Accept/Reject a Special Order
04.Opportunity cost
05. Adding or dropping product line or other segments
06. Sell or process further decision:
07. Keep vs. Replace a Piece of Equipment
0.8 Which products to produce when there is a constraining factor
09.Reduce or Maintain Price decision
10.Expand or reduce Capacity decision
Some special formulas for relevant costings includes-
01. Operating Asset = Total assets-non operating asset
02. ROI % = (Operating income/ operating assets)%
or, ROI = Profit Margin*Assets Turn over
03. Residual Income = Operating Income - (Operating asset* desire ROI)
04.Product responsibility Margin =Sales-Variable cost-traceable fixed cost (per product line)
05. Segment margin(Loss) = Sales-Variable cost-Traceable fixed cost
Let,s start with Practical Example
Practical Example. (01)
The Accounting department of corporate practice bd LTD provide the following cost of producing 8000 shifters units each year.
Per unit 8000 Units
Direct Materials cost = 6.00 Tk.48,000.000
Labor cost = 4.00 Tk.32,000.000
variable overhead =1.00 Tk 8,000.000
Supervisor salary =3.00 Tk. 24,000.000
Depreciation of special equipment=2.00 Tk. 16,000.000
Allocated general overhead=5.00 Tk. 40,000.000
Total cost=21.00 Tk. 1,68,000.000
Additional information:
An out side supplier has offer to sell 8000 unit of product a year to corporate practice bd LTD for a price of only Tk.19.00
Requirement:(Try yourself)
01.Should the company stop producing the shifters internally and buy them from out side supplier?
02. Assume that Space now being used to produce shifters could be used to produce new cross country bike that would generate a segment margin of Tk.60,000.000 per year.under this condition the corporate practice bd LTD should accept the supplier offer and use the available space to produce the new product line.
Practical Example. (02)
The Accounting department of ABC LTD operating at 75% level of activity produces and sells two products A & B.The cost sheet of two products are as under
Product-A Product-B
Selling price per unit = 23.00 19.00
Unit produce and sales = 600.00 400.00
Direct Materials cost = 2.00 4.00
Direct Labor cost = 4.00 4.00
Factory overhead (40% fixed) = 5.00 3.00
Selling & Admin OH (60% fixed) = 8.00 5.00
Total cost per unit = 19.00 16.00
Additional information:
01.Factory overhead absorbed on the basis of machine hours which is limiting factor. The machine hour rate Tk.2.00 per hour.The company received an offer from canada for the purchase of product A at a price 17.50 per unit.
02. Alternatively the company has another offer from middle East he purchase of product B at a price 15.50 per unit.In both cases a special packing charge 0.50 per unit has to be borne by the company.
03.The company can accept either of the two export orders and in either case the company can supply such quantities as may be possible to produce by utilizing the balance of 25% of capacity.
Your required to prepare : (Try yourself)
01.A statement showing the economics of the two export proposals giving your recommendation as to which proposal should be accepted and
02. A statement showing the overall profitability of the company after incorporating the export proposal recommendation by you.
Practical Example. (03)
An umbrella manufacturer makes an average profit Tk.2.50 per unit on a selling price of Tk.14.30 per unit by producing and selling 60,000 units at 60 %potential capacity .His cost of sales per unit as under-
Per unit
Direct Materials cost = 3.50
Direct wages cost = 1.25
Factory overhead (50% fixed) = 6.25
Selling & Admin OH (25% variable) = 0.80
Total cost per unit =11.80
Additional information:
01.During the current year the manufacturer intended to produce the same number units but estimated that fixed cost would go up 10% while the rate direct wages and direct materials will increase by 8% and 6% respectively.
02.However the selling price can not be change
03.Under this situation the manufacturer obtain a offer for a further 20% of his potential capacity.
Your required to prepare : (Try yourself)
01.What minimum price would you recommended for acceptance of the offer to ensure the manufacturer an overall profit Tk.1,67,300 ?
Practical Example. (04)
The corporate practice bd LTD. makes Bimjal Pressure Cookers has raveled the following cost data-
Cost data Amount .TK
Direct Materials cost = Tk.20,00,000
Direct labor ,Stores ,power,others variable cost = TK.6,00,000
Manufacturing overheads = Tk 7,00,000
Packing & variable distribution cost = Tk.4,00,000
General overheads including selling = TK.3,00,000
Total Amount = Tk.40,00,000
Income from sales = TK.50,00,000
Budgeted profit = Tk.10,00,000
Additional information:
Proposal-01
The general sales manager suggests to reduce selling price by 5% and expects to achieve an additional volume of 50%. there is different manufacturing capacity. More intensive manufacturing programme will involve additional cost of TK.50,000 for production planning.It will also be necessary to open an additional sales office at the cost of Tk.1,00,000 per annum.
Proposal-02
The sales manager on the other hand suggests to increase selling price by 10% which it is estimated will reduce sales volume by 10%. At the same time saving in manufacturing overheads and general overheads of Tk.50,000 & TK.1,00,000 per annum respectively is expected on this reduce volume.
Requirement:
01.which of these two proposals would you accept and why?
Ans:
Comparative statement of Budgeted profit
|
Particulars |
Budget for output 100% |
Proposal-01 output for 150% |
Proposal-02 output for 90% |
|
Sales(A) |
50,00,000 |
71,25,000 |
49,50,000 |
|
Cost of sales |
20,00,000 |
30,00,000 |
18,00,000 |
|
Raw materials |
|
|
|
|
Labor, stores, power |
6,00,000 |
9,00,000 |
5,40,000 |
|
Manufacturing overhead |
7,00,000 |
7,50,000 |
6,50,000 |
|
Packing & variable distribution cost |
4,00,000 |
6,00,000 |
3,60,000 |
|
General overhead Including selling |
3,00,000 |
4,00,000 |
2,00,000 |
|
Total cost of sales(B) |
40,00,000 |
56,50,000 |
35,50,000 |
|
Profit(A-B) |
10,00,000 |
14,75,000 |
14,00,000 |
Comments:
The above statement indicates that proposal -01 is
preferable as compared to proposal-02 as it gives more profit (14,75,000-14,00,000) =Tk.75,000. The factory is
having an idle capacity so there is no hesitation in the accepting the proposal-01.