Illustration 4 ZED Limited is working by employing 50 skilled workers. It is considering the introduction of incentive scheme-either Halsey scheme (with 50% bonus) or Rowan scheme-of wage payment for increasing the labour productivity to cope up the increasing demand for the product by 40%. It is believed that proposed incentive scheme could bring about an average 20% increase over the present earnings of the workers; it could act as sufficient incentive for them to produce more. Because of assurance, the increase in productivity has been observed as revealed by the figures for the month of April, 2019. Hourly rate of wages (guaranteed) $30 Average time for producing one unit by one worker at the previous performance (This may be taken as time allowed) Number of working days in the month Number of working hours per day of each worker Actual production during the month Required : (i) Calculate the effective rate of earnings under the Halsey scheme and the Rowan scheme. (ii) Calculate the savings to the ZED Limited in terms of direct labour cost per piece. (iii) Advise ZED Limited about the selection of the scheme to fulfil its assurance. 1.975 hours 24 8. 6,120 units
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.
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