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Unit 6: Marginal Costing and Absorption Costing




          Following are the important areas of decision-making or applications of marginal costing:  Notes

          1.   Fixation of Price,
          2.   Decision to Make or Buy,

          3.   Selection of a Profitable Product Mix,
          4.   Decision to Accept a Bulk Order,
          5.   Closure of a Department or Discontinuing a Product,
          6.   Maintaining a Desired Level of Profi t, and

          7.   Evaluation of Performance.

          6.9.1 Determination of Sales 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 considers 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 profi tability 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

          dealerships of two different giant industrial brands. The greater the share of the profi tability in
          volume will be selected and vice-versa.
                 Example: 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:
          1.   250 units of A and 250 units of B
          2.   400 units of B only

          3.   400 units of A and 100 units of B
          4.   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.





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