The Hindu Business Line : How to fix price when profit goal is clear?

Indirect expenses: Fixed — Rs 1,60,000 per annum; variable — Rs 2 per unit; semi-variable — Rs 60,000 per annum up to 50 per cent capacity and an extra Rs 20,000 per annum for every 20 per cent increase in capacity or part thereof.

Each unit yields scrap which is sold at 20 paise. In 2002, the factory worked at 50 per cent capacity for the first three months but it was expected to work at 80 per cent capacity for the remaining nine months. During the first three months, the selling price per unit was Rs 12. What should be the price per unit for the remaining nine months to earn a total profit of Rs 2,51,000 in the whole year?

Working note (WN) 1: Normal capacity: 1,20,000 units per annum, that is, 10,000 units per month.

Year 2002: Factory worked at 50 per cent capacity for three months. That is, 3 x 10,000 x 50 per cent = Rs 15,000

For nine months: 9 x 10,000 x 80 per cent = Rs 72,000 (that is, 8,000 units for nine months)

Year 2002: Production (units) = Rs 87,000

Capacity utilisation = 87,000/1,20,000 x 100 = 72.5 per cent

WN2: Direct labour: (Rs 2 per unit subject to a minimum of Rs 12,000 per month)

First 3 months: 5,000 x 2 = 10,000 per month

But minimum of Rs 12,000 per month for three months — Rs 36,000

For nine months: 8000 units x Rs 2 = Rs 16,000 per month x nine months = Rs 1,44,000 (minimum Rs12,000 per month only)

Total — Rs 1,80,000

WN3: Semi-variable overheads: 50 per cent capacity — Rs 60,000

22.5 per cent capacity — Rs 20,000 + Rs 20,000 = Rs 40,000

72.5 per cent capacity utilisation = Rs 1,00,000

Solution: The statement of cost and profit (production of 87,000 units) is presented in Table 1.

Selling price for remaining nine months:

Total cost = Rs 8,92,400

Add: Desired profit = Rs 2,51,000

Total = Rs 1,143,400

Less: Sale of first three months (15,000 units at Rs 12) = Rs 1,80,000

Sales value for nine months = Rs 9,63,400

Selling price per unit = Rs 9,63,400 / 72,000 units = Rs 13.38 per unit

Note: A similar question was asked in the June 1989 ICWA (Intermediate) exam.

Marginal costing

THE analysis of the cost structure of a company's product gives a break-up, which is shown in Table 2. The budgeted sales for the next year are Rs18,50,000.

Determine: i) the break-even sales volume; ii) the profit at the budgeted sales volume; and iii) the profit, if actual sales a)

drop by10 per cent from budgeted sales; and b) increase by 5 per cent from budgeted sales.

WN1: The statement of contribution and profit is as follows:

Budgeted sales for next year — Rs 18,50,000

Direct materials (32.8 per cent of sales) = Rs 6,06,800

Direct labour (28.4 per cent of sales) = Rs 5,25,400

Factory overheads (12.6 per cent of sales) = Rs 2,33,100

Distribution expenditure (4.1 per cent of sales) = Rs 75,850

General and administrative expense (1.1 per cent of sales) = Rs 20,350

Variable cost (79 per cent of sales) = Rs 14,61,500

Contribution (21 per cent of sales) = Rs 3,88,500

Less: Fixed overheads = Rs 3,15,000

Profit = Rs 73,500

WN2: PV ratio = C/S, that is, 3,88,500/18,50,000 = 0.21, that is, 21 per cent

Solution: BEP = F/PV ratio = Rs 3,15,000 / 21 per cent = Rs 15 lakh

ii) Profit will be Rs 73,500 (WN1)

iii)(a) In this case, there will be two situations: one, reduction in sales quantity (Table 3) and, two, reduction in sale prices (Table 4).

iii)(b) The profit, if actual sales increase by 5 per cent from budgeted sales. In this case too, there will be two solutions: one, increase in sales quantity (Table 5) and, two, increase in sales prices (Table 6).

Material cost variances

THE standard mix of a product is: X — 60 units at 15 paise per unit; Y — 80 units at 20 paise per unit; Z — 100 units at 25 paise per unit; total — 240 units

Ten units of the finished product should be obtained from this mix.

In February, 10 mixes were completed and the consumption was as follows: X — 640 units at 20 paise per unit; Y — 960 units at 15 paise per unit; Z — 840 units at 30 paise per unit; total — 2,440 units

Actual output was 90 units. Calculate all appropriate material variances.

WN1: Standard cost (SC) of 10 mixes is presented in Table 7.

Output 10 x 10 =100 units of finished product

WN2: SYR = Rs 500/100 units = Rs 5 per unit of finished product

WN3: Actual cost (AC) of 10 mixes is presented in Table 8.

Actual output, 90 units of finished product.

WN4: SCAP = 90 units at Rs 5 = Rs 450

WN5: SQ: Material X: For 100 units — 600 units consumption

Therefore, for 90 units, the consumption is 540 units

Material Y: 720 units (90/100 of 800)

Material Z: 1000 x 90/100 = 900 units

Solution: The calculation of material variances is as follows:

a) Material cost variance (MCV) = SCAP - AC

450 - 524 = 74 (A)

b) Material price variance (MPV) = AQ (SR - AR)

X = 640 (0.15 - 0.20) = 32 A

Y = 960 (0.20 - 0.25) = 48 F

Z = 840 (0.25 - 0.30) = 42 A

Total variance = 26 A

c) Material usage variance = SR (SQ - AQ)

X = 0.15 (540 - 640) = 15 A

Y = 0.20 (720 - 960) = 48 A

Z = 0.25 (900 - 840) = 15 F

Total variance = 48 A

d) Material mix variance (MMV) = SR (SPPAU - AQ)

X = 0.15 2440 x 600 - 640 / 2400 = 0.15 (610 - 640) = 4.50 A

Y = 0.20 2440 x 800 - 960 / 2400 = 0.20 (813 1/3 - 960) = 29.33 A

Z = 0.25 (2440 x 1000 - 840 / 2400) = 0.25 (1016 2/3 - 840) = 44.16 F

Total variance = 10.33 F

e) Material yield variance (MYV) = SYR (AY - SY)

SY: For 2400 units — 100 units of finished product.

Therefore, for 2440 units, finished products would be 101 2/3 units

MYV = SYR (AY - SY)

5.00 (90 - 101 2/3) = 58.33 A

Reconciliation: MCV = 74 A = MPV (26 A) + MUV (48 A)

MUV (48 A) = MMV (10.33 F) + MYV (58.33 A)

Equivalent production

ROYAL Ltd has given the following information relating to Process No 001 for May 2002:

Opening work-in-process — nil

Units introduced:10,000 units at Rs 3 per unit.

Expenses debited to the process: Direct materials — Rs 14,650; labour — Rs 21,148; overheads — Rs 42,000

Normal process loss — 1 per cent of input

Closing work-in-process — 350 units (degree of completion - material: 100 per cent; and labour and overheads: 50 per cent)

Finished output — 9,500 units

Degree of completion of abnormal loss is 80 per cent.

Units scrapped as normal loss were sold at Rs 2.50 per unit.

Prepare: Statement of equivalent production; statement of cost of finished goods; abnormal loss; closing work-in-process; and Process Account No. 001

The statement of equivalent production (EQP) (units introduced — Rs 10,000) is shown in Table 9.

ii) Cost of finished goods = 9,500 x 10.98942 = Rs 1,04,400

Abnormal loss = 40 x 10.98942 = Rs 439

Closing WIP: Materials: 350 x 4.48938 = Rs 1571.28

Labour: 175 x 2.17684 = Rs 380.95

Overheads: 175 x 4.3232 = Rs 756.56

Sub-total = Rs 2,709

Total = Rs 1,07,548

iii) Process A/c No. 001 is presented in Table 10.

(To be concluded)

(Suggested answers to the December 2002 CS (Intermediate) paper on cost and management accounting.)

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