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Case Study on Standard Cost per Unit of Finished Products

Category: Management Paper Type: Case Study Writing Reference: APA Words: 1900

The standard cost per unit is presented in the following table.

Standard Cost Per Unit of Finished Goods

Standard Cost of material

11.7

Standard Cost of Labor

37.5

Variable Overhead

0.9

Fixed Overhead

5

Total Cost Per Unit

55.1

According to given case scenario, standard cost of material required for one product is 11.7. While variable overhead based on skilled labor rate per hour is 0.9 calculated as:


Determining Selling Price of Product:

Following the company’s policy of 20% mark-up, the products can be offered on RO 70. At this selling price, company would be able to cover all its overhead costs and direct cost to produce a profit of 20% on each product unit. See the following table for further details:

Selling price

70

Total Cost

55.1

Mark Up

20%

Profit

14. 9

Calculated Mark Up

21%

Thus selling price

Selling Price

70


Case Study 2

The Management of the company appointed you as a consultant to carry out the analysis and submit a report on Variance Analysis of the company for the year 2019. The report should include the following :

(a)   Material Cost Variances

To calculate material cost variance the standard per unit material price and actual per unit price are calculated. (see the following tables)

Standard Per Unit Materials

Materials

Quantity

Std Price / kg

Total Material Price

Per Unit

L

15

24

360

3.6

M

20

18

360

3.6

N

30

15

450

4.5

65

57

1170

11.7

Per Unit Material Price

1170

11.7

 

Actual Per Unit Price

 

Materials

Quantity

Material Price

Per unit

L

1360

36720

4.59

M

1400

29400

3.675

N

2700

35100

4.3875

Per Unit Actual Price

12.6525


(b)  Labour Cost variances

Now calculating the standard labour rate per unit and actual labour rate per unit for labour cost variance.

Standard Labour Rate Per Unit

Type

Hours

Rate

Number of Workers

Total Cost

Per Unit

Skilled

3

25

2

150

15

Semi Skilled

3

15

4

180

18

Unskilled

3

5

3

45

4.5

Rate Per Unit 

37.5

 

Actual Labour Rate Per Unit

Type

Hours

Rate

Number of Workers

Total Cost

Per Unit

Skilled

2700

30

2

162000

20.25

Semi Skilled

2700

12

5

162000

20.25

Unskilled

2700

6

2

32400

4.05

Rate Per Unit 

44.55

 

 


(c)   Overhead Variances


 Case Study 3

a)      Prepare Process Q account and calculate the total cost of producing the product.

 

Process Q Account

Units

RO

Units

RO

Transferred From P process

5000

175000

Direct Material

16100

Finished WIP

500

Labor

22725

Materials

1288

Overhead

14790

Labor

1136.25

Total

228615

Overhead

887.4

WIP

Previous

36303

Opening Stock

1000

7000

Total

39614.7

Materials

4000

Transferred Goods

Labor

1500

5000

175000

Overhead

1500

Total

14000

Total

214615

214615


Thus the total cost is 214615 for the production and processing of goods to produce final products in the selected time duration.

b)     Estimate the selling price of the final product as per the company’s policy and prepare a brief report on the production process to the Management.

·         Selling Price:

According to the company's policy, at least a 20% profit margin is required between the selling price and overall cost of production. Thus, the selling price for the finished goods would be the following:


The per unit selling price can be calculated by dividing this determining selling price by the total number of units.

·         Report on Production Process:

The production process of the company is quite slow therefore the company had a greater ratio of work in process inventory. Analysis and process account development suggest that the company's management need to pay attention to material utilization and labour performance. A greater percentage of incomplete inventory was representing the failure of labour to work on those goods. For instance, in opening stock of work in process products units were 100% complete as to materials while labour work was only completed by 70%. Thus, such a situation indicate inefficiency of labour to complete work within the allocated time duration.

Case Study 4

1.      Meanwhile, the Management of the company appointed you as a consultant to estimate the total cost of the four products under each method of distributing the joint cost.

Average Cost Method:

Method 1

Average Cost Method

Units

Sales

Profit

Cost

Average Cost

Apportioned Cost

Azithromycin

1500

30000

5250

24750

15.9123

23868.46154

Clarithromycin

2000

48000

6000

42000

15.9123

31824.6

Levofloxacin

1600

25600

3200

22400

15.9123

25459.68

Moxifloxacin

1400

16800

2520

14280

15.9123

22277.22

6500

120400

16970

103430

103429.9615

Physical unit method:

 

Method 2

 

Physical Unit Method

Units

Weight (decimal)

Weight %

Allocated Cost

Azithromycin

1500

0.23077

23%

23868.46154

Clarithromycin

2000

0.30769

31%

31824.61538

Levofloxacin

1600

0.24615

25%

25459.69231

Moxifloxacin

1400

0.21538

22%

22277.23077

 

103430

Survey method:

The points used in the survey method are  1,2,2,1 for all four products.

Method 3

Survey Method

Products

Units

Points

Weighted Units

Ratio

Cost Per WU

Apportioned Cost

Cost Per Unit

Azithromycin

1500

1

1500

15

3.844981413

5767.472119

3.844981413

Clarithromycin

2000

2

4000

40

3.844981413

15379.92565

7.689962825

Levofloxacin

1600

2

3200

32

3.844981413

12303.94052

7.689962825

Moxifloxacin

1400

1

1400

14

3.844981413

5382.973978

3.844981413

10100

38834.31227

 

Sales Value Method:

Method 4

Sales Value Method

Products

Cost

Selling price

Production Quantity

Total

Joint Cost Allocated

Azithromycin

24750

20

1500

30000

25771.59468

Clarithromycin

42000

24

2000

48000

41234.5515

Levofloxacin

22400

16

1600

25600

21991.7608

Moxifloxacin

14280

12

1400

16800

14432.09302

Total Joint Cost Allocated

120400

120400

103430

Net Realizable Value method:

Method 5

Net Realisable Value Method

 

Product

Price

Separable Cost

Quantity

Estimated Sales

NRV

Joint Cost Allocated

Azithromycin

20

4750

1500

30000

25250

26932.12

Clarithromycin

24

9000

2000

48000

39000

41598.12

Levofloxacin

16

5400

1600

25600

20200

21545.69

Moxifloxacin

12

4280

1400

16800

12520

13354.06

96970

103430.00

 

2.      Also, advise the management of the company which method is best suitable.

Following the above analysis and literature review, it can be said that the most appropriate and suitable method for cost calculation is the physical unit method and survey based method. The survey based cost allocation method is a suitable option when managers have to plan about future business operations as it enables them to use genius guess and their experience. However, the physical unit method is also appropriate because it does not require rough estimation from average cost.

Case Study 5

a)      Analyse the profitability of each job in the month of April 2020 by preparing T accounts.

The following t-accounts are developed for four major jobs included in the business operations of the company. At the end of each t-account, a statement of profit and loss is attached which will be used for profitability analysis.

Job: 1

Job 1

Revenue

425

Bal: 425

 

 

Factory Overhead

64.977

  @ 19.69% of the total overhead.

Bal: 64.98

 

Cost of Goods Sold

 

Raw Material: 260

 

Labor : 135 [9 x 15 =135]

Bal: 395

Revenue

425

Less:

Direct Material

260

Direct Labor

135

Overhead

64.98

Total Expense

459.98

Profit

-34.98

 

Job: 2

Job 2

Revenue

 

600

Bal: 600

 

 

Factory Overhead

 

77.5

 

  @ 23.48% of total overhead.

Bal: 77.5

 

Cost of Goods Sold

 

Raw Material: 310

 

Labor : 165 [11 x 15 =165]

Bal: 475

Revenue

600

Less:

Direct Material

310

Direct Labor

165

Overhead

77.5

Total Expense

552.5

Profit

47.5

 

Job: 3

Job 3

Revenue

 

525

Bal: 525

 

Factory Overhead

 

87.5

 

  @  26.51% of total overhead.

Bal: 87.5

Cost of Goods Sold

 

Raw Material: 350

 

Labor : 180 [12 x 15 =180]

Bal: 530

Revenue

525

Less:

Direct Material

350

Direct Labor

180

Overhead

87.5

Total Expense

617.5

Profit

-92.5

Job: 4

Job 4

Revenue

 

700

Bal: 700

 

Factory Overhead

 

100

 

  @  30% of the total overhead.

Bal: 100

 

Cost of Goods Sold

 

Raw Material: 400

 

Labor : 195 [13 x 15 =195]

Bal: 595

 

Revenue

700

Less:

Direct Material

400

Direct Labor

195

Overhead

100

Total Expense

695

Profit

5

Considering the above t-accounts and profit analysis table, it is clear that only job 2 is producing a profit. While the job 1 and 3 are totally in the loss.

b)     Advise the firm, how much price should be charged to each job in the next month assuming the material costs are expected to increase by 10% and assuming the firm needs a mark-up of 20%. (Round off the Job price to the nearest hundreds)

In case, material cost increases by 10%, the company would have more challenges and difficulties to generate profit by covering all cost and expenditures. It would increase the total direct material cost for all jobs. In such a situation, achieving the targeted mark-up of 20% is more challenging. Although, the company can achieve this target for job 1 if the company generate at least 50% additional sales revenue. A 30% increase in revenue is required for job 2. Somehow, job 3 will hardly meet this target of 20% profit if sales are increased by at least 60%. The job 4 requires 40% more sales revenue to meet this target of 20% profit.

Increase in Cost and 20% Profit Mark up

Job 1

Job 2

Job 3

Job 4

Revenue

638

780

840

980

Less:

Direct Material

286

341

385

440

Direct Labor

135

165

180

195

Overhead

65

78

88

100

Total Expense

486

584

653

735

Profit

152

197

188

245

Rounded up

150

200

200

250

24%

25%

22%

25%

 

c)      Prepare a report to assist the owners of the business to make a decision.

Profitability analysis of four jobs in Al Wathba Services indicates inefficient business management and planning. Current business operations are not enough profit for the company. From 4 jobs only two jobs are capable to meet the basic cost and expenses for the relevant month. While expecting an increase in cost and expenses will also generate a negative impact on the business outcomes. In such a situation, business need changes. Improvement in employee performance and resources utilization efficiency are required to control increasing cost and expand profit margin. Although, an increase in sales revenue is also required to cover the cost and generate profit.

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