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hello Sir,
I want to ask that how the machine cost( related to note 4 ) for key pad and display screen has been calculated I mean what is the logic behind the working
thank youI will explain for key pads (it is the same logic then for the display screen).
The total machine costs currently are 26,000 of which 4,000 is fixed. So, the 4,000 will apply in the future as well.
However the remaining 22,000 is variable. Since it relates to set-up costs, it will vary with the number of set-ups needed.
At the moment they are producing 80,000 units in batches of 500, which means that they are producing 80,000/500 = 160 batches. This means that the variable cost per batch is $22,000/160 = $137.50
In future they will be producing 80,000 units in batches of 400, which means that they will be producing 80,000/400 = 200 batches.
So the total variable cost will be 200 x 137.50 = $27,500Hope that helps.
i have question to part b) of this exercise
i dont understand how they come up with answer why they deduct variable cost and labour from cost of outsourcing per unit??
please helpThey subtracted because the difference is the saving to be made by making as against outsourcing. The only subtract the variable costs because the fixed costs will stay the same.
sir why cant we produce full 100000 units of display screen instead of producing full 100000 units of keypad because from the examiners answer of part a the incremental cost of buying is more for the display screen i.e (0.416/unit for display screen and 0.18625/unit for key pad ) so aren’t we incurring more cost by buying display screen because the dispaly screen costs relatively more to buy than that of keypad???
sir i dont know why am getting so much confused from the examiners answer this thing is turning me crazyBut display screens take twice as long to make than key pads, so with limited hours available key pads are the better use of the limited hours (key factor analysis).
Sir,in part b the answer is we make 33334 display screens.so how many keypads do we make?100000-33334?
You have not read the question (or the answer) correctly.
They make control panels and each requires 1 display screen and 1 keypad.
They need therefore 100,000 of each. For display screens they will make 66,666 and buy in the other 33,334. For keypads, then will make all 100,000 themselves.
(The answer does actually state this in the final 3 lines of the examiners answer to part (b), before the bit in italics.)
Sir, I’m not sure but you did mention in your lecture that whenever a question has a fixed cost (just like this question), it’s considered not relevant. But why is it the otherwise here?
You either misheard or misunderstood 🙂
Fixed overheads are not relevant if the total fixed overheads stay unchanged, which is what we assume unless told differently. They will not change simply due to producing more or less (by definition), but if the question says that the total does change (because there are specific fixed overheads which will not exist if one product is not produced) then the change is relevant.
We are concerned with all changes in all costs.
Could you kindly explain the heat and power costs under note 3 for me also? Why is it considered as attributable fixed costs? What are the variable and fixed costs in that note and why do we take into account of fixed cost into this costing.
The question says that the general apportionment of fixed costs is 50% of the labour cost – and this fixed cost will therefore be incurred whatever happens.
For keypads, the labour cost is $40,000 and therefore 50% x $40,000 = $20,000 is a general apportionment. This leaves $64,000 – 20,000 = $44,000 as a specific fixed cost that is only incurred it keypads are produced in-house.
The same workings for display screens.Correct me if my understanding is right : the general apportionment of $20k is to be excluded from the $64k for keypads is because it is not relevant fixed cost?
In part (B) of the question we need to take the variable cost of producing and deduct it from the cost of buying it..
So why dont we take heat and power cost of 44000 ( 64000-50%x40000) for keypads. they are the cost of heat and power used directly if keypads are produced?? Why has this been excluded as i see it a variable cost?
Have you not read note 1 below the examiners answer to part (b)? !!
It says: “It is equally as acceptable to have treated the heat and power costs as variable and include them in the above. It will not have changed the outcome and is an entirely acceptable interpretation of the scenario.”
Hi SIr,
For part B of the question you said that examiners report says”It is equally as acceptable to have treated the heat and power costs as variable and include them in the above. It will not have changed the outcome and is an entirely acceptable interpretation of the scenario.”. However in June 2018 revision kit statement its not mentioned.
But logically the heat and light & depreciation insurance cost are incurred specifically for the project and wont it therefore be relevant?Because to compare to costs of buying we need to incur those cost that arise as part of making the products right? so if we dont incur these cost wont the answer change?
Plus i believe the fixed cost incurred as machine cost should also be included coz in part A of the question we are assuming it as specific fixed cost?
Can u please help me here. and can u also let us know if we will get marks if we write an assumption stating that the above cost are assumed as specific so we are including it as part of variable cost?
thanks in advance
Firstly, that sentence appears in the examiners own answer. Whether or not it appears in the Revision Kit answer is not relevant.
With regard to heat and power, the question makes it clear that the heat and power costs include an apportionment of general factory costs and that this general apportionment will be incurred whether or not the components are manufactured in-house.
The fixed machine costs are included in part (a). They are specific fixed costs (per the question) and are any incurred if they are made in-house.
The examiners answer (and the BPP answer, which is a copy of the examiners answer) shows two different ways of arriving at the same answer – either are fine, whichever you find more obvious. However the final answer remains the same, and there are no assumptions other than those specifically given in the question.
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