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F. Naz, Chartered Accountant
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# Ra-ja

Need answers today to 6, 7 and 8

Have a nice day. Having problem in attaching file here therefore I am pasting the solution here, thanks.

6. As the fixed costs are related to A and B is not related to C and D therefore they should be calculated separately as follow.

 Fixed A and B C and D Cost 20000 25000 Hours 7000 5000 rate per hour 2.857143 5

After its allocation no product is generating less than 25% mark on therefore they all can be produced, the profitability is given below.

 A B C D Selling price 98 38.5 59.5 49 Material 15 5 10 5 Labor 30 5 15 10 Variable 15 7.5 5 7.5 17.14286 2.857143 15 6 Total cost 77.14286 20.35714 45 28.5 Profit 20.85714 18.14286 14.5 20.5 Mark on 27.04% 89.12% 32.22% 71.93%

It would be better to use the variable costing approach for decision making and the contribution margin for each product should be calculated for each product based only on variable cost, not the fixed cost.

7 The profitability calculated on the basis of allocation of total fixed and variable overhead over labor hours is not justified as the fixed cost of each group of products is not related to each other.

Moreover the cost allocated on the basis of 40% for all products is also not justifiable as it will not represent the actual cost of each product being incurred.

If the profitability is determined after dropping product A, the cost allocation will not be realistic as all overheads are allocated on the basis of direct labor hours, but in this scenario, the fixed cost portion of product C and D is not related to product B therefore it s also not justifiable.

Only the allocation mentioned in number 6 is near to accuracy and justify the situation.

8. Yes as they are not providing the justified basis of allocation of overheads, there is not problem in material and labor cost. It would be better to use variable costing approach to determine contribution margin ratio for each product. The ABC costing approach can also be considered but detail data is not given, so comments cannot be given in detail for the use of ABC costing method.

Customer: replied 4 years ago.

How did you get the numbers? I don't see any of the formulas. I need you to please show me how to get the numbers or submit my answers in an excell format. I can't really do anything not nowing how to get the results. I have to show the formulas. Thanks

HXXX

Customer: replied 4 years ago.

How did you get the numbers? I don't see any of the formulas. I need you to please show me how to get the numbers or submit my answers in an excell format. I can't really do anything not nowing how to get the results. I have to show the formulas.

How did you get total costs, profit and mark on

Thanks

HBello