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It a law that fixed cost and variable cost are assigned to cost unit and full amount of the overhead are absorbed according to activates.
The fixed production overhead is not appropriate under variable and fixed. Variable is only helpful for managers to mark decision. Absorption useful when income tax and financial reporting.
Steps in absorption cost
Document the cost
Separate the cost
Direct cost is straightforwardly connect to output
Apportion ate the indirect costs to the service sector.
Reapportion costs to service support dep and production dep .
Add an overhead retrieval proportion
Then absorb the direct and indirect into single output.
What are the limitations when making decision?
A C costing is more stressed on total cost so it is not that useful to the managers when making decision, planning or controlling.
A manager main concern is on volume profit, which is not showing therefore the managers have to make their own inspiration to the decision.
The information is not accurate. In fixed overhead depend on the values that are estimate so it can be over or under absorption of the same.
Two techniques that can be used from the organisation to find out the cost of a product
01) Marginal costing:
It is express the behavioural than the operational. Features of the cost main intention is to divide the Fixed and variable elements. This can be useful for short term muilty product organisation.
The main rules are:
If we sale one item extra what will happened is that,
Receipts will rise by the sales price of what we sold
Cost will rise by VC per unit
Profit will rise depend on the amount of the contribution that given.
Also if the sale falls the profit also falls according to the contribution.
Eg: TC produce say 1000 units is £5000. If we produce say 1001 units the TC will £5002,cost of the next unit is £2. MC is £2
Advantages of MC
In cost of the product the fixed overhead is not charged therefore the variable cost per unit is not taken.
This also helps short term planning profit by using break even profitable system.
Rate per hour
Labour hours per unit
In demand per unit
total labour hours
shortage of labour
rate per hour
machine hours per unit
demand per unit
total machine hours
machine hours over capacity
input to the product is direct machine hours and direct labour hours
as above it shows that shortage of labour hours therefore it is effective
less variable cost
total variable cost
contribution per unit
units to produce W2.W1
less fixed cost
factory over head
contribution per unit
contribution labour hours
Cortina is more profit product as u can see above it is 1st rank. Therefore accordingly ranked.
produce units based on the ranking
* lab unit
total hours available
product according to the ranking
we cannot produce all Zodiac due to less labour
then we 7680/2.67 = 2876.404494 this will be the units that will
since there is shortage of labour hours this will affect the Zodiac production by 3000 - 2876 = 126 units
loss of profit = 126 * 9.36
From: Advise Consultant
KOOLSHOP is a private company that managed by Jane .As it is rapidly growing she has decided to employee mangers to control each section as tactical information and strategic information. She is new to the system. As a consultant she request an appropriate managing system that help her to get information quick and practical way. Therefore I have explained how annual budgeting system can help her, also I have explained the worth of fixed budget, flexible budget, rolling budget.
This report will explain above:
What is annual budgeting system?
A budget is a prediction for the future income and expenses and also it can estimate if the company can carry on or should change in plan.
It shows the business plan for next year, for 3 years or for 5 years. Budget shows the right track to develop your business.
How does budgeting helps in a business:
Budget help in a business in less spending than earning.
Budget help to success the financial goals and organise a future planning and also it divide the money into income, saving, expenses.
Short term it helps to get rid of credit issues and help in financial emergencies. It controls money by preparing structure plan.
Here are some steps that should follow in order of successful enforce budget
Positioning financial goals: it is like when starting project managers and directors should discuss what we want to accomplish this month or year it depends, what new product that we should do and can offer long team or short team.
Categorizing fixed expense in the company like rent, insurance, tax, Gross profit, expense, debt.
Maintain financial records:
Make sure that everything is up to date and relevant information.
Balancing and adjusting the records: