Page 103 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes Problem 7:
From the following information has been extracted of EXCEL Rubber Products Ltd.:
Direct materials A ` 16
Direct Materials B ` 12
Direct wages A 24 Hrs at 50 paise per hour
Direct wages B 16 Hrs at 50 paise per hour
Variable overheads 150% of wages
Fixed overheads ` 1,500
Selling price A ` 50
Selling price B ` 40

The directors want to be acquainted with the desirability of adopting any one of the following
alternative sales mixes in the budget for the next period:
(a) 250 units of A and 250 units of B
(b) 400 units of B only
(c) 400 units of A and 100 units of B

(d) 150 units of A and 350 units of B
State which of the alternative sales mixes you would recommend to the management?
Solution:
The first step is to determine the contribution margin per unit of A and B.

The determination of the contribution of product A and B are through the preparation of Marginal
costing statement.

Particulars Product A (`) Product B (`)
Selling price 50 40
Less: Direct Materials 16 12
Direct wages 12 8
Variable overheads 18 12
Variable cost 46 32
Contribution 4 8

The next step is to determine the profit level of every mix.
(a) 250 units of A and 250 units of B.
The first step is to determine the total contribution of the mix. Why the total contribution
has to be found out?
The main reason is to determine the profit level of the mix through the deduction of the
fixed overheads

Product of A 250 units × ` 4 ` 1,000
Product of B 250 units × ` 8 ` 2,000
Contribution ` 3,000
Fixed overheads ` 1,500
Profit ` 1,500

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