PEV June June 05 Paper Question 2.2 Help Please

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
The question sets out management accounts done on a marginal costing basis (not absorption). The answers for question 2.2 state that the monthly savings in OVERHEADS are £78 and £1 per unit by deviding the saving by 1000 units produced. Is this not absorption costing?? Surely with marginal costing you use a sales basis and devide the overheads by 850 units sold?? What am I missing??

Thanks in advance

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:PEV June June 05 Paper Question 2.2 Help Please

    Just had a thought...

    Is it because the overheads are part of the variable costs? Normally you assume that they are fixed but this may not be the case??

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:PEV June June 05 Paper Question 2.2 Help Please

    If you have my answer you may find that I took a different view from the then examiner. I would expect that we would have agreed if we had we met up after his answer had been published. The crux of the difference lay in the future sales of Model H. It boils down to break even.

    Look at the difference in variable cost that the sub-contract would cause and look at the fixed savings.

    You can then say:
    Fixed savings divided by the extra variable cost of subcontracting or if you say it the other way round
    the fixed cost of continuing to produce divided by the saving on variable cost of not sub contracting

    The sub-contract cost is £180
    The in house variable cost of sales in April was £83,000 for 850 units or £97.65 per unit

    So not sub-contracting would save us £82.35 per unit

    Not sub-contracting would incur fixed costs as follows:

    £78,000 per month(as per MD's quote) and
    1/12 of £12,000 annual saving (as per MD's quote)
    I.e. £79,000 per month

    If you then do a division:

    Fixed Cost
    saving in variable cost per unit

    £79,000/£82.35 = the number of units you must sell to justify continuing to produce in house.

    = 960 units

    My conclusion is that as this figure is more than the actual sales in April AND more than the budgeted sales it seems unlikely that we will achieve this target.
    Therefore it would be more cost effective to sub-contract.

    I hope that makes sense.

    sandy.hood@chichester.ac.uk

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