Production and cost data of Akoo Ltd have been recorded over two years thus: Last year Current year Production 60,000 units 64,000 units Total costs (GHȼ) 1,820,000 1,961,400 Between last year and the current year, there has been 5% cost inflation. Required i) Calculate the real fixed and variable costs ii) Estimate what total cost will be next year when it is expected that there will be a 4% cost push inflation and output will be 70,000 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.
Production and cost data of Akoo Ltd have been recorded over two years thus:
Last year Current year
Production 60,000 units 64,000 units
Total costs (GHȼ) 1,820,000 1,961,400
Between last year and the current year, there has been 5% cost inflation.
Required
i) Calculate the real fixed and variable costs
ii) Estimate what total cost will be next year when it is expected that there will be a 4% cost push inflation and output will be 70,000 units.
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