The normal production capacity of a company is 10,000 units per month. On this basis, the fixed costs are assigned, which, in unit terms, amount to: General and administrative expenses $25.00 Selling expenses $5.00 Unit variable costs are fully proportional to production and sales, and amount to: Direct Labor $18.00 Materials $14.50 Manufacturing overhead $8.00 The price of the product in the market is $90 and the commissions to the sellers correspond to 5% of the sales. The company is studying the possibility of closing for a time that could reach 2 years, due to a period of depression that is estimated to affect the industry in that period, a fact that would reduce its activity levels to 20% of its normal capacity. If it closes, fixed charges could be reduced by 30%, and if it continues to operate, the reduction would only reach 15%. What would be the differential savings of opting for the best alternative?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
The normal production capacity of a company is 10,000 units per month. On this basis, the fixed costs are assigned, which, in unit terms, amount to:
General and administrative expenses $25.00
Selling expenses $5.00
Unit variable costs are fully proportional to production and sales, and amount to:
Direct Labor $18.00
Materials $14.50
Manufacturing overhead $8.00
The price of the product in the market is $90 and the commissions to the sellers correspond to 5% of the sales. The company is studying the possibility of closing for a time that could reach 2 years, due to a period of depression that is estimated to affect the industry in that period, a fact that would reduce its activity levels to 20% of its normal capacity. If it closes, fixed charges could be reduced by 30%, and if it continues to operate, the reduction would only reach 15%.
What would be the differential savings of opting for the best alternative?
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