Comments

  1. Profile photo of Vera says

    Sir, can you please tell me when calculating the expected cost per unit how I should treat with wastage and idle time. I’m doing a Dec 2007 past paper which includes both.

    • Profile photo of John Moffat says

      (This isn’t actually a target costing problem – it could be in any question where you have to calculate the expected cost. In future, please ask in the Ask the ACCA Tutor F5 forum rather than as a comment under a lecture. :-) )

      However……wastage and idle time are really the same problem
      Suppose that 10% of the materials that we buy are wasted.
      That means that for every 100 kg we buy, 10kg are wasted and so only 90 kg are available for production. Or, to put it the other way round, for every 90 kg we need for production we will need to buy 100 kg.
      So….if we need (for example) 450 kg for production, then we will need to buy 450 x 100/90 = 500 kg. (and it obviously checks, but 500, waste 50 (10%) and you are left with the 450 you need).

      It is exactly the same idea for idle time. Instead of materials to buy, it is hours to pay for. Instead of wastage it is idle time. Instead of materials needed for production, it is hours we need to work.

  2. avatar says

    Dear John

    I had not realised the value of your lectures until now that I want to sit for my F5 exam on June 2nd 2014. I however feel that on your explanations of closing the “cost gap” you did not talk about varying production levels. Here I am talking about economies of scale. I hope the cost we are talking about is not just the variable cost but also the overheads i.e fixed costs.

    Won’t that be another way of closing the cost gap?

    Thank you.

    • Profile photo of John Moffat says

      Possibly.

      However, the problem is that economies of scale would be achieved by producing more. But there would only be point in producing more if we could sell more, and that would likely mean having a lower price.

      You would usually expect the estimate of reasonable selling price to be tied in with estimate of likely demand.

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