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Dear Mr Moffat,
I was doing the genesis question (question 3) in your set of practice questions and answers in the course note for F5. I had some small doubts to clear with you.
First of all, in part (b), where we had to use the marginal costing approach, we were using the optimum production quantity calculated (as 54,000 units of S and 113250 units of R) to get the maximum profit.
Also, in part (c), we were using the optimum production mix (i.e. 144,000 units of R and 13,000 units of S) to get the total throughput. However, my problem is in calculating the maximum profit under the throughput approach in part (c). For the variable production overheads, as you treat them as fixed costs in throughput accounting, why were we calculating the variable production overheads by taking the actual production and sales for period 1 ( 45,000 units of S and 120,000 units of R)? Why not calculate the variable production overheads on the basis of the optimum throughput quantity, too (i.e. 144,000 units of R and 13,000 units of S)? Or why not use maximum demand to calculate the variable production overhead, but why use the actual production and sales of period 1 to calculate the variable production overhead, as a fixed cost, for throughput accounting profit purposes?
This seems very confusing for me. Kindly please explain this to me.
Thanks,
Gabriel
The question specifically says in the last paragraph that the variable overheads are considered to be fixed, based on the product mix in part (a). The product mix in part (a) is production of 120,000 of R and 54,000 of S.
This is actually very sensible. In part (a) we did not know that there was the limits on production and the costings were based on this.
In part (c) we end up producing fewer units, but if the total variable cost is now fixed (apart obviously from the materials) then producing fewer units will not mean any reduction in total costs.(If you watch my lecture on throughput accounting, I make this very point and explain what to assume about the now ‘fixed’ costs if the question does not specify (although in this question it did specify))
Thanks a lot for your reply. However, if the question doesn’t specify, about what to assume about the now “fixed” costs, then could you please tell me how we would calculate the fixed costs? Would we calculate fixed costs on the optimum quantities or the maximum demand?
Thanks.
Have you watched the lecture?
I ask, because as I wrote before, I explain this very point in the lecture!!!If you are not told, you assume that the constraint on time was not known when the cost cards were produced and therefore that they were based on producing to maximum demand.
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