[Samit]

Dear Sir,

I got to know by looking at the Specimen exam that the Syllabus has changed from September 2016.

Thank you 🙂

[Samit]

Thanks Sir.

[Samit]

Sir, can you please explain why the relevant cost per kg of M is $3.25?

Thanks

[Samit]

Thank you Sir 🙂

[Samit]

Sir, as mentioned above that the relevant cost in this question is the incremental cost, i.e, the variable cost/unit i.e, $80. Why is the books answer $113? Is it a printing mistake, because $80 is the variable cost and $33 is the Fixed O/H?

Thanks

[Samit]

Sir, thank you very much. I have understood when/when not to include Opportunity costs(OC) in Lifecycle costing i.e, when a decision has already been made to make a new product, we don’t include the OC; but when deciding whether or not to make a new product we include the OC.

Sir, regarding the same question, there is a Patent application cost of $500000 which includes $20000 of lawyer fees, who is a permanent employee of the Company. The answer provided includes the whole amount ($500000).

I don’t understand why the answer doesn’t deduct the lawyer fees of $20000 , because he/she is a permanent employee and would be paid regardless of any type of work he does for the Company. (Is it because the Company has to recover salary costs? If so, does it mean that any other project the Lawyer works on wont include the Lawyer fees OR the salary costs would be apportioned to all the project he works on?)

Thanks

[Samit]

Sir, question 3 in past paper June 2016. It says that “having spent time on development of a new product, the Company missed out on the opportunity of earning an estimated $800000 contribution from the sale of another product”.

In the answer provided they ignore the opportunity cost, saying that the calculation is done using Lifecycle costing NOT Relevant Costing.

Sir, as you mentioned above that normally Opportuinity Costs are included, I don’t understand why they ignored it by explaining that it is a Lifecycle Costing question NOT Relevant Costing!!

Thanks

[Samit]

Hi Sir, I am not sure about when to include/exclude Opportunity costs in Lifecycle calculations. What kind of wording in the question requires to include Opportunity costs in the Lifecycle calculation? (borrowing cost of money, investment opportunity in another project)

Thanks

[Samit]

Sir, thanks for your reply. Does the skilled labour being paid on an annual salary basis or a per hour rate have effect on the calculation of relevant costs?

Also, how is the lost contribution $8000?

[Samit]

Sir, if the skilled labour in the above question is paid on a salary basis rather than a pay rate per hour, what changes will it have in the calculations for the following situations:

a) If skilled labour is fully employed in production of P and doing the contract means shifting the skilled labour from production of P?
b) If skilled labour has spare capacity

My answer:
a) relevant cost for contract = just the lost contribution (as skilled labour is paid an annual salary)
b)relevant cost for contract = there is no lost contribution as skilled labour has spare capacity, so the relevant cost will only include material cost.

[Samit]

Sir, in the above answer for Q=22000, Total cost = $366800?? I get Total Cost = $366600. Am I doing it wrong?

For Q=22000,
Purchase Cost = 120000*$3 = $360000
Order Cost = (120000/22000) * 605 = $3300
Holding Cost = (10% of $3) * Average Inventory = $0.3 * (22000/2) = $3300

Total Costs(Q:22000) = $366600

[Samit]

Sir, the question asks for EOQ, which I have calculated as follows:

EOQ=Sq.Root((2*450*1000) / 5) = 424.26kg Approx. 424Kgs

I can calculate the EOQ; but considering the information given in the question, if I’m asked to find the order quantity that minimizes total costs, I am having some trouble:

I calculate the total costs for each order quantity, and the one which gives the lowest total cost is the order quantity that minimizes total costs:

Sir, the question mentions the Opportunity cost of holding 1kg, which is 5% of the purchase cost. Do we include the opportunity cost when calculating the Total Costs??

Total Cost = Purchase Cost + Order Cost + Holding Costs

For Q = 424 Kg,
Purchase Cost = 1000kg * $100 = $100000
Order Cost = $450 * (1000/424) = $1061
Holding Costs (this is where i get confused) = $5 per unit of average stock ; Sir, as there is no lead time, is the average stock 424kgs? If yes, holding Costs = $5 * 424 = $2120

Total Costs (Q=424kgs) = $100000+$1061+$2120 = $103181.

Similarly, for different Q’s :-

For Q = 500kg, Total cost = $98000+$900+$2500 = $101400
For Q = 750kg, Total cost = $97000+$600+$3750 = $101350
For Q = 1000kg, Total cost = $96000+$450+$5000=$101450
For Q = 1250kg??? As the annual demand is only 1000kg, do we consider buying 1250kg, if it minimises the total costs??

If yes, for Q = 1250kg, Purchase Cost = $1250*100*0.88 = $110000
Order cost = $450 *1 = $450
Holding cost = $5 * 1250 = $6250
Total Cost = $116700

According to the above total costs, order quantity of 750kg will minimise total costs.

[Samit]

Ok, got it! Thankyou 🙂
Sir, as you mentioned labour is never a bottleneck in Throughput Accounting; is it because direct labour costs are fixed costs in the short-term?

[Samit]

Sir, I don’t understand how machine time is the bottleneck in the production:

Total Machine hours available = 4000 hours
Machine time per unit = 0.01 hr
So, number of units that can be produced = 4000/0.01 = 400000 units.

Total labour hours = 50000 hrs
Labour time per unit = 7/12 = 0.583 hr
So, number of units that can be produced = 50000/0.583 = 85714 units.

According to the number of machine hours available, 400000 units can be produced, while with the number of labour hours available, only 85714 units can be produced.
So, doesn’t it mean that the labour time is the bottleneck, NOT the machine time.

** I see that they are “Budgeted” labour hours, and it means that labour hours are not limited to 50000 hrs. But, they can be varied to increase production up until 400000 units.

Also, if they are capable of producing 400000 units with 4000 machine hrs, why would they only budget 50000 labour hrs, with which they would only be able to produce 85714 units. Please help me understand.

Thanks.

[Samit]

Sir, is the following working correct:

Revised Revenue: 80% of budgeted = 80% of 100 = 80%
V.C: 80% of budgeted = 80% of 40 = 32%
F.C. unchanged = 20%
So, profit = 80% – (32+20)% = 28%

In terms of % of revised revenue(100%):
V.C = 32/80 = 40%
F.C = 20/80 = 25%
Profit = 28/80 = 35%

[Samit]

Sir, which of the following is the correct calculation for sales:

1) Sales: $480000
Sales increase by 15% if extra shift is worked, i.e, $480000+15% = $552000

2) Current sales: $480000
Sales increase by 15% if extra shift is worked , but sales price will have to be reduced
by 3% to sell the extra volume:
i.e, $552000 – 3% = $535440

I am confused whether the 3% reduction in the sales price of all units sold is already
accounted for when the question says “sales can be increased by 15% if extra shift is
added”?

Sir, please comment whether the following calculations are done correctly:

1) Direct Materials: $140000 + 15% = $161000
$161000 – 2% = $157780

2) Variable O/H: $50000 +15% = $57500

[Samit]

I’m getting a different answer. Rubanjr, what is the answer in the text from where you got the question?

Total Input: 0.90*x = 1200
x = 1200/0.90 = 1333.33 kg

Standard Total cost: (0.60*1333.33*$60) + (0.40*1333.33*45) = $72000

Actual Total cost incurred : $69600

Total material cost variance = $72000 – $69600 = $2400 Favourable

[Samit]

Thank you 🙂

[Samit]

Hi. This is how I worked it out. I may be wrong!

Material Purchased = 12000 L
Material Usage Variance = $1815 F
$1815 buys: 1815/2.5 = 726L
This means that production is such that 12726L worth of units have been produced just by using 12000L.

Actual Production = (12000/10.5) + (*726*/10.5)
= 1212 units

*Mind that the actual material used/purchased is only 12000L. It is due to the material usage being Favourable that we are able to produce 12726L worth of units by using just 12000L.

When you get in contact with your teacher, please let me know how he worked this out so that I can know if I am doing anything wrong.
Thanks.

[Author]

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