Amirul Sdn Bhd, a pen manufacturer, identified that per pen its labour cost was RM5 and its material cost was RM 1.50. Its only other costs were factory rent and administration which were RM 12,000 and RM 14,000 respectively. Last year 8,000 pens were produced and sold at their standard price of RM 13.70. Next year sales are expected to increase by 20%. There is no expected increase in costs. You are required to: Produce comparative flexible budget for the 2 levels of output. Management is cautious and would also like to budget for activity
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Amirul Sdn Bhd, a pen manufacturer, identified that per pen its labour cost was RM5
and its material cost was RM 1.50. Its only other costs were factory rent and
administration which were RM 12,000 and RM 14,000 respectively. Last year 8,000
pens were produced and sold at their standard price of RM 13.70. Next year sales are
expected to increase by 20%. There is no expected increase in costs.
You are required to:
Produce comparative flexible budget for the 2 levels of output. Management is cautious
and would also like to budget for activity.
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