By Scott Jordan,2014-12-03 23:51
14 views 0

    Preparing Financial Forecast

    Answer to SAQ 2.3

    Megan Limited

    Marginal Cost Statement

    For the year to 31/12/2007

     Per Unit 20,000

    ? units

     ? ? 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)

     8.50 170,000

    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

    Megan Limited


    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 =

    10,285 units.

    Relevant Costs

    ; 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

    Opportunity Costs机会成本

     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

    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.

    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

Report this document

For any questions or suggestions please email