Page 102 - DCOM206_COST_ACCOUNTING_II

Unit 5: Differential Costing

At 100% capacity: Notes
Factory cost 66.67% of sales value or 2/3 of sales

2
= * 2,40,000 = ` 1,60,000
3
Prime cost = –75% of factory cost
75
= * 1,60,000 = ` 1,20,000
100
Factory overhead at 100% level given in the problem is 40,000

Administration and selling overhead
20
= * 2,40,000 = ` 48,000
100
Of 48,000, 75% is variable, i.e. 36,000 and 12,000 is fixed

At 60% capacity:
Prime cost is 60% of ` 1,20,000 = 72,000
Works overhead is ` 33,000, Admistration and selling overhead variable is 75% and fixed is
` 12,000
Statement Showing Profitability for New Work
Capacity 80% 40% Additional Total 100%
Sales 1,92,000 33,000 2,25,000
Less cost of Sales
Prime Cost 96,000 20,000 1,16,000
Works overhead 36,000 14,000 50,000
Factory overhead 1,32,000 34,000 1,66,000
Adm and Selling 40,800 6,450 47,250
1,72,800 40,450 2,13,250
Profit or Loss 19,200 7,450 11,750

Now, As profit is reduced by ` 7450 additional order is not profitable.

Selecting the Suitable Product Mix

In the market, dealership is offered by the various companies to the individual intermediaries
in promoting the sale of products. Before reaching an agreement with the company to act as a
dealer, normally every individual consider the profitability of the product mix offered by the
firm. For example, there are two different companies brought forth their advertisements in
offering the dealership to the individual trading firms viz HCL and IBM. The profitability under
the dealership banner should be appropriately considered prior to take decision. To take rational
decision, the firm should compare the profitability of both different dealership of two different
giant industrial brands. The greater the share of the profitability in volume will be selected and
vice versa.

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