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P. V. Ratnam

THREE products A, B and C, are produced from a single process.

Each product can be sold at the end of each process, or can be further processed independently to produce superior products, which are marketed under different names — X, Y and Z respectively. Details for a period are given in Table 10.

The initial process costs are: Material — Rs 2,00,000; labour and overhead — Rs 2,00,000

Further processing costs are incurred at the commencement of the second stage of operation.

During this stage vigorous quality control causes a percentage of input to be rejected, with zero scrap value.

Required: i) calculate the apportionment of costs to products A, B and C using sales value of production as the basis of apportionment; and ii) explain whether the initial process should be undertaken and also state whether further processing is to be undertaken or not.

The statement of apportionment of initial processing costs of Rs 4,00,000 is shown in Table 11.

Note: Product A: 1,20,000 / 5,00,000 x 4,00,000 = 96,000, and so on

ii) Initial process should be undertaken because of contribution of Rs 1,00,000 (5 lakh - 4 lakh).

Further processing is shown in Table 12.

Incremental sales revenue (7,80,200 - 5,00,000) = Rs 2,80,200. Less: Further processing cost = Rs 2,78,000

Incremental profit (1,02,200 - 1,00,000) = Rs 2,200

Hence, further processing also should be undertaken in view of incremental profit of Rs 2,200.

CVP analysis

A COMPANY'S report of operations for the years 2000 and 2001 is shown in Table 13.

i) At what level of sales does the company break-even, assuming no change in its cost-volume-profit relationships?

ii) Consider the following changes for the next year: Selling price to be decreased by 10 per cent; variable cost to be decreased by 25 per cent; and fixed costs to be increased by Rs 32,500.

What sales volume would be needed to generate a profit equal to 10 per cent of sales?

i) 2001: Sales, Rs 3,75,000; profit, Rs 10,000

2000: Sales, Rs 3,12,500; profit, Rs (7,500)

Difference: Sales, Rs 62,500; profit, Rs 17,500

PV ratio = Change in profit / change in sales

17,500 / 62,500 = 0.28, that is, 28 per cent

(Note: Variable cost is 72 per cent of sales).

Profit = (sales x PV ratio) - fixed cost

Rs 10,000 = (3,75,000 x 28 per cent) - F

Rs 10,000 = Rs 1,05,000 - F

F = Rs 1,05,000 - Rs 10,000 = Rs 95,000

BEP = Fixed cost / PV ratio

95,000 / 28 per cent = Rs 3,39,286

ii) Selling price to be decreased by 10 per cent, that is, 100 per cent - 10 per cent = 90 per cent

Variable cost: 72 per cent - 25 per cent of 72 per cent = 72 per cent - 18 per cent = 54 per cent of sales

Contribution = 90 per cent - 54 per cent = 36 per cent of sales

PV ratio = C/S = 36 per cent / 90 per cent = 0.4, that is, 40 per cent of sales

Fixed cost: Rs 95,000 + Rs 32,500 = Rs 1,27,500

Sales = F + P / PV ratio

That is, S = 1,27,500 + 0.1 S / 40 per cent

0.4 S = 1,27,500 + 0.1 S

0.4 S - 0.1S = 1,27,500

0.3S = 1,27,500

S = 1,27,500 / 0.3 = Rs 4,25,000

Reconciliation: Contribution = sales x PV ratio

Contribution = Rs 4,25,000 x 40 per cent = Rs 1,70,000

Less: Fixed cost = Rs 1,27,500

Profit = Rs 42,500

That is, 10 per cent of sales of Rs 4,25,000

(Concluded)

(Suggested answers to the December 2002 ICWA (Stage I) paper on cost accounting.)

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A single process and three products

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