Page 98 - DCOM206_COST_ACCOUNTING_II

Unit 5: Differential Costing

At 8000 level of output, the total sales revenue is ` 7,60,000 and the total cost is ` 5,92,000 leaving Notes
a profit of ` 1,68,000. The fact that this level of output leaves a profit means that fixed costs have
been recovered already. Hence we have to take only the incremental cost for further level of
output. For an additional sales of 2.000 units the incremental cost is ` 7,10,000 - ` 5,92,000 =
` 1,18,000. The cost per unit therefore is 1,18,000/2000 = ` 59 for which the price quoted is ` 70
per unit. Hence the offer is to be accepted.
Problem 3:

(Increased production capacity) A company at present is working at 90% of its capacity and
producing 13,500 units per annum. It operates at flexible budgeting control system. The following
figures are obtained from its budget.
Capacity Utilisation
90% (`) 100% (`)
Sales 15,00,300 16,00,000
Fixed 3,00.500 3,00,600
Semi-fixed expenses 97,500 1.00,500
Variable expenses 1,45,500 1,49,500
Units manufactured 13,500 15,000

Labour and material costs per unit are constant under the present conditions. Profit margin is
10%.
(a) You are required to determine the differential cost of producing 1,500 units by increasing
capacity utilisation to 100 per cent.
(b) What would you recommend as an export price for these 1500 units after considering that
overseas prices are much lower than inland prices?

Solution:
Sales at 90% capacity utilisation 15,00,000
Less: Profit 10% 1,50,000
Cost of goods sold 13,150,000
Less: Expenses(Fixed, semi and variable) 5,43,000
Cost of material and labour 8,07,000

Therefore, Cost of material and labour at 100% capacity utilisation is:
100
8,07,000  = ` 8,96,667
90
Differential Cost analysis will be as follows:

Capacity Utilisation
90% (`) 100% (`)
Production (units) 13500 15000
Material and Labour (in `) 8,07,000 8,96667
Variable expenses (in `) 1,45,000 149500
Semi-fixed expenses (in `) 97,500 1,00,500
Fixed expenses (in `) 3,000.500 3,000,600
13,50,000 14,47,267

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