Prepare an analysis of the decision strategy


Problem:

Makati Plc makes and sells a number of products. Products A and B are products for the market prices are available at which Makati can obtain a share of the market as detailed below. Estimated data for the forthcoming period is as follows:

i) Product Data


Product A

Product B

Other Products

Production/Sales(units)

5,000

10,000

40,000


ZMW'000

ZMW'000

ZMW'000

Total direct material cost

80

300

2,020

Total direct labour cost

40

100

660

ii) Variable overhead cost is ZMW1, 500,000 of which 40% is related to the acquisition, storage and use of direct materials and 60% is related to the control and use of direct labour.

iii) It is current practice in Makati Plc to absorb variable overhead cost into product units using overall companywide percentages on direct material cost and direct labour cost as the absorption bases.

iv) Market prices for products A and B are ZMW 75 and ZMW 95 per unit respectively.

v) Makati Plc requires a minimum estimated contribution: sales ratio of 40% before proceeding with the production/sale of any product.

Required:

a) Prepare estimated unit product costs for Product A and Product B where variable overhead is charged to product units as follows:

i) Using the existing absorption basis as detailed above.

ii) Using an activity-based costing approach where cost drivers have been estimated for material and labour related overhead costs as follows:


Product A

Product B

Other Products

Direct material related overheads-cost drivers are material bulk. The bulk proportions per unit are:

4

1

1.5

Direct labour related overheads-cost driver is number of labour operations(not directly time related).Labour operations per product unit are:

6

1

2

Prepare an analysis of the decision strategy which Makati Plc may implement with regard to the production and sale of products A and

B. Use unit costs as calculated in a)(i) and a)(ii) together with other information given in the question in your analysis. Your answer should include relevant calculations and discussion and be prepared in a form suitable for presentation to management.

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Accounting Basics: Prepare an analysis of the decision strategy
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