If the plant is showing underutilization; it means the capacity is over estimated. Two techniques are used to allocation of costing i.e., 1. On actual capacity 2. On actual production. Now if the company is using 1st technique and take the actual capacity of plant which will be less from already adopted then variable cost and fixed cost both will affect as high. And if the company is using 2nd technique then there will be no change in Fixed or Variable cost.
| Capacity | 100,000 | 120,000 |
| Actual Production | 80,000 | 80,000 |
| Utilization % | 80% | 67% |
| | | |
| Per Unit on Capacity | | |
| Fixed Cost | 50,000 | 50,000 |
| Per Unit Cost | 0.50 | 0.42 |
| Variable Cost | 60,000 | 60,000 |
| Per Unit Cost | 0.60 | 0.50 |
| | | |
| Per Unit on Production | | |
| Fixed Cost | 50,000 | 50,000 |
| Per Unit Cost | 0.63 | 0.63 |
| Variable Cost | 60,000 | 60,000 |
| Per Unit Cost | 0.75 | 0.75 |
I didn't consult any costing book or technique. It is just my idea. And also I am not the student of this subject.
From:
Sent: Monday, October 22, 2012 10:36 AM
To: vu-star-angels@googlegroups.com; vu-study-corner@googlegroups.com;
Subject: ::: vuaskari.com ::: gdb MGT402 DISCUSS
Discussion Question:
Star company - a partnership firm of Mr. "A" and Mr. "B", deals in ball points manufacturing business. Despite of using the traditional approach of costing, the company is earning handsome profits. One day Mr. C (son of partner A) visited the firm and got a chance to check some of the organization's reports incidentally. He found that due to the lack of knowledge about costing techniques, the plant capacity is being incorrectly estimated and this has resulted in underutilization of the plant. He discussed this issue with his father on the dinner and suggested Mr. A to adopt some modern costing techniques so that the plant capacity can be fully utilized. Mr. A discussed this issue with his partner, Mr. B on the next day. But, both the partners were hesitant to adopt the suggestion because they thought that due to this, their cost of goods produced might gone up and hence their profit could be reduced. Later, Mr. C tried to convince them that the profit could not be reduced. He strongly recommended the proposal by saying that "Variable cost varies on per unit of output produced, whereas fixed cost remains constant on per unit of output produced".
Required:
As a student of cost accounting, will you be agree with the statement given by Mr. C? Support your answer with logical reasons.
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