Company A produces a component used in the production of one of the company’s main products. The costs are budgeted as follows: Amount per unit (R) Amount per 5 000 units (R) Materials 5 25 000 Labour 15 75 000 Variable overhead 10 50 000 Depreciation 4 20 000 Allocated general overhead 12 60 000 Total cost 46 230 000 The components can be purchased from an outside supplier at a cost of R35 per unit. Required: Q.3.2 State five qualitative aspects that the company must evaluate before making a decision in Q.3.1 above. Q.3.3 Briefly explain the difference between avoidable costs, differential costs and opportunity costs. Provide one example of each cost. Q.3.4 List two examples of scenarios where relevant costing can be used effectively in decision‐making.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Company A produces a component used in the production of one of the company’s main products.
The costs are budgeted as follows:
Amount per unit (R) Amount per 5 000 units (R)
Materials 5 25 000
Labour 15 75 000
Variable
Allocated general overhead 12 60 000
Total cost 46 230 000
The components can be purchased from an outside supplier at a cost of R35 per unit.
Required:
Q.3.2 State five qualitative aspects that the company must evaluate before making a decision in Q.3.1 above.
Q.3.3 Briefly explain the difference between avoidable costs, differential costs and opportunity costs. Provide one example of each cost.
Q.3.4 List two examples of scenarios where relevant costing can be used effectively in decision‐making.
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