Page 113 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes If the company manufactures the product/component at ` 17 which will facilitate to book profi t
` 1 from the price of ` 18 which is available from the market.
The next stage is decision criteria.
Worth of Production: Cost of the production < Price of the product available in the market
The firm is better advised to take the course of production rather than purchase of the product.

Worth of Purchase: Cost of the production > Price of the product available in the market
The product available in the market is dame cheaper than the manufacturing of a product. The

firm is better advised to buy the product rather than the manufacturing of a product. If the

product price comes down to the price of ` 16 facilitates the firm to save ` 1 from the cost of
manufacturing.
6.9.3 Own or Hire

Marginal costing helps in taking the decisions regarding the capital investment. Marginal costing
helps to take the decisions for owning the capital asset or hire the asset.

Example: If company X needs a machinery for a specific project and after that project
there is no use of the machinery then company can decide to hire the machinery for that project.

A company has its own trucks for transporting raw materials and finished products from one
place to another. It seeks to replace these trucks by keeping public carriers. In making this
decision, of course, the depreciation of the trucks is not to be considered but the management
should take into account the present expenditure on fuel, salary to drive and maintenance.

6.9.4 Shut Down or Continue

As discussed earlier, marginal costing technique helps in deciding the profitability of a product.

It provides the information in a manner that tells us how much each product contributes towards
fixed cost and profit; the product or department that gives least contribution should be discarded

except for a short period. If the management is to choose some product out of the given ones,
then the products giving the highest contribution should be chosen and those giving the least
should be discontinued.
Example: A company manufactures three products X, Y and Z. It has prepared the
following budget for the year 2003:
Total Product X Product Y Product Z
Sales 4,20,000 80,000 2,50,000 90,000
Factory Cost
Variable 2,90,500 40,000 1,74,000 76,500
Fixed 29,500 5,000 16,000 8,500
Production Cost 3,20,000 45,000 1,90,000 85,000
Selling and Administration
Cost
Variable 35,000 14,000 14,000 7,000
Fixed 8,000 3,500 3,200 1,300
Total Cost 3,63,000 62,500 2,07,200 93,300
Profit 57,000 17,500 42,800 - 3,300 (loss)

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