Preparing Financial Forecast
Answer to SAQ 2.3
Marginal Cost Statement
For the year to 31/12/2007
Per Unit 20,000
? ? 12.00 240,000 Sales Revenue
? Less: Variable Costs
Direct Material 4.00 80,000
Direct Labour 2.50 50,000
Direct Production Overhead 2.00 40,000
(?52,000 - ?12,000)
Contribution 3.50 70,000
BEP = Less: Fixed Costs
Production Overhead Fixed Costs 12,000
Contribution pu Administration Overhead 26,000
?48,000 Selling and Distribution Overhead 10,000
? 3.50 48,000
= 13715 units, Profit ?22,000
Proposed MARGINAL COST STATEMENT
Per This year Next year
Unit 24,000 18,000 units
units ? Sales Revenue 12.00 288,000 216,000
? ? ? Less: Variable Costs
? ? Direct Material 4.00 96,000 72,000
Direct Labour 2.50 60,000 45,000
Direct Production Overhead 2.00 48,000 36,000
8.50 204,000 153,000
3.50 84,000 63,000 Less: Fixed Costs
Production Overhead 12,000 12,000
Administration Overhead 26,000 26,000 Selling and Distribution Overhead 10,000 10,000
48,000 48,000 Profit ?36,000 ?15,000
The margin of safety for THIS year is 24,000 units – 13,715 units =
; Short-term planning decisions require information for the
purpose of making decisions involving choice, where the
choice is the preference of one alternative against other
less desirable options.
; In this analysis, relevant costs are costs that will enable the
preferred options to be identified.
; Relevant costs are future, differential costs that come into
existence when a decision is made. They also differ
depending on the option selected.
Example 2.8 P122
； This concept has been borrowed from Economics 在经济学上是
一种非常特别的既虚既实的一种成本。。A formal definition for
Opportunity Cost would be:
； "The value of the next best opportunity lost as the result of
preferring the chosen alternative to the rejected alternative".它是
(Oxford English dictionary) ？ 工作P对于工作Q来说具有机会成本；但工作Q对于工作P来说就已经没
Make or Buy Decisions
Example 2.10 P126
Bravo Limited ?
Estimated costs of making component AA1
Materials 14,000 Labour 12,000 Variable Overheads 3,000 Fixed Overhead (direct). These costs will stop if we buy 6,000 component AA1 from Delta Limited.
Fixed Overhead (common). These costs will continue if 12.000 we buy component AA1 from Delta Limited.
TOTAL COST 47,000
Solution to Example 2.10
； We should never make the comparison of the ?47,000 total cost
of manufacturing AA1 with the buying-in cost of ?40,000.
； This is because Bravo Limited have allocated ?12,000 common
fixed costs which will continue, even if the manufacture of
component AA1 should cease. All other costs, totalling ?35,000
might be saved, depending on whether labour can be deployed
Bravo Limited ?
Revised estimated costs of making component AA1
To allow comparison with quote from Delta Limited
Variable Overheads 3,000
Fixed Overhead (direct). These costs will stop if we buy 6,000
component AA1 from Delta Limited.
TOTAL COST 35,000
； A comparison of this ?35,000 avoidable cost with the offer
of ?40,000 is the correct one to make. In this example, it is
cheaper for Bravo Limited to continue to make component
； This conclusion might well be different if we are working to
full capacity, when buying in the component would release
capacity to do other work.
Sell or Process Further Decision
？ Doing something additional with a view to adding value to the firm. ？ The most obvious example is a decision to process a semi-finished
product further, rather than selling it in its present condition.
To achieve the requirement of outcome 1 & 2, you
should be satisfying the following:
Outcome 1: Operating Statement
？ Prime cost could be correctly computed ？ Production Overheads correctly computed ？ Administration Overheads correctly
？ Selling/Dist Overheads correctly computed ？ Profit Margin correctly computed
？ Selling price correctly computed ？ Format acceptable and layout neat
Outcome 2: Marginal Costing
？ Total Contribution for each alternative is
？ Total profit for each alternative is correct ？ Format acceptable and layout neat; ？ A short report could outline each option; ？ Recommendation is made and rational
justification is given