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Dear John,
Please help me with this questionF Co makes and sells two products, A and B, each of which passes through the same automated
production operations. The following estimated information is available for period 1.
Product unit data
A B
Direct material cost ($) 2 40
Variable production overhead cost ($) 28 4Original estimates of production/sales of products A and B are 120,000 units and 45,000 units
respectively. The selling prices per unit for A and B are $60 and $70 respectively.Maximum demand for each product is 20% above the estimated sales levels.
Total fixed production overhead cost is $1,470,000. This is absorbed by products A and B at an average
rate per hour based on the estimated production levels.
One of the production operations has a maximum capacity of 3,075 hours which has been identified as a
bottleneck, limiting the overall estimated production/sales of products A and B. The bottleneck hours
required per product unit for products A and B are 0.02 and 0.015 respectively.the throughput return per hour of Product B is $2000. Calculate the TPAR for B.
Why is variable cost of Product A also taken while calculating the total conversion cost?
I assume you are referring to the factory cost per hour.
With throughput accounting we assume that in the short term all costs are fixed apart from the cost of the materials.
So the total variable production overheads are treated as being fixed costs.
I do explain this in my free lectures on throughput accounting. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
yes Sir, I understand that all other costs ought to be taken as fixed cost. But when we are finding the TPAR of Product B why are we INCLUDING the costs of A in the conversion costs?
Both products are made in the same processes and to find the factory cost per hour we use all of the costs (other than materials) for all the products.
Again, have you watched my free lectures on this?
yes sir, I have watched them and rewatched it again now, and I understand my wrong assumption now.
thank you 🙂
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