1. Cost & Management Accounting
Lecturer-44

2. Deprival Value Deprival Value Replacement Cost Recoverable Amount
Whichever is less
Realizable Value
Whichever is higher
Value in Use

3. Deprival Value
It represents the value that an entity would have to recover if it were deprived of an asset.

4. Example
A machine cist Rs. 70,000five years ago. It is expected that the machine will generate future revenue of 50,000. Alternatively, the machine could be scrapped for Ts. 45,000. An equivalent machine in the same condition cost 48,000 to buy now. What is the deprival value of the machine.
48,000
48,000
50,000
Whichever is lower
50,000
45,000
Whichever is higher

5. Example
A company has been making a machine to order for a customer. Cost incurred to date in manufacturing the machine are Rs 80,000 and progress payments of Rs. 30,000 had been received from prior to the liquidation.
The sales department has found another company willing to buy the machine Rs. 40,000 once it has been completed.
To complete the work , the following cost would be incurred:
a). Material has been bought at a cost of Rs. 10,000. They have co other use, and if the machine is not finished, they would be sold for scrap Rs. 6,000.
b). Further labor costs would be Rs 12,000. Labor is in a short supply and if the machine is not finished, the work force would be switched to another job, which would earn Rs. 30,000in revenue an din cur direct cost of Rs. 20,000 and absorbed overhead Rs. 8,000.
c). Consultancy fee Rs. 14,000 if the work is not completed, the consultant’s contract would be cancelled at a cost Rs. 6,000.
d). Allocation of general overhead cost Rs. 10,000 would be added to the cost of additional work. `

6. Solution Relevant cost may be summarized as follows:
Revenue from completing work ,000
Less Relevant cost:
Material: Opportunity cost 6,000
Labor: Basic pay 12,000
Opportunity cost 10,000
Incremental cost of consultancy 8,000
(36,000)
(4,000) ,000

7. Approaches of decision-making:
Contribution margin approach
Differential cost approach

8. Scenarios under contribution margin approach:
Product mix
Product addition
Deletion of product
Drop out of department
Make or buy decision
Shut down decision

9. Scenarios under differential cost approach:
Increase the production in respect of demand
Shut down decision
Make or buy decision
Assets replacement

10. Question
F S co. makes two products, the F & S. Per unit. Variable cost are as follow:
Variable cost:
F (Rs) S (Rs)
Direct material
Direct labor
Variable cost
8 7
The sales price per unit id Rs. 14 per for F and Rs 11 for S. During July the available direct labor id limited to 8,000 hours. Sales demand in July is expected to be 3,000 units for F and 5,000 units for S
Required: Monthly fixed costs are Rs 20,000.and opening stocks of finished goods and work in progress are nil. Determine profit maximizing production mix.

11. Solution
Step-1 Confirm that the limiting factor is something other than sales demand:
F S Total
Labor hours per unit 2 hrs 1 hr
Sales demand 3,000 units units
Labor hours needed 6,000 hrs 5,000 hrs 11,000 hrs
Labor hours available ,000 hrs
Short fall ,000 hrs
Labor is limiting factor in production.
Step-2 Identify the contribution earned by each product per unit
F (Rs) S (Rs)
Sales price
Variable cost
Unit contribution
Labor hours per unit hrs 1 hrs
Contribution per labor hour

12. Solution Product Demand Hours required Hours available F 5,000 S 3,000
Step-3 Determine the optimum production plan:
a).
Product
Demand
Hours required
Hours available F
5,000 S
3,000
6,000
Total
-----
11,000
8,000
b).
Product
Units
Hours needed
Contribution per unit F
5,000 S
3,000
6,000
Total
-----
11,000
8,000
Total
20,000
9,000
29,000
Less Fixed cost ,000
9,000

13. Question:
You are the sales director of Edith Manufacturing Company. The results of last year’s trading were submitted to you by the accountant and show:
Sales Rs.200,000
Less: Marginal cost of sales ,000
Contribution ,000
Less: Fixed costs ,000
Net Profit Rs. 25,000
You have conducted a study of the profit potential of two new products; the manufacture of one can be undertaken without incurring additional fixed costs.
Solution:
Product
Pat Pad
Selling price per unit Rs Rs.50
Variable cost of manufacturing Rs Rs.10
Other variable costs Rs Rs.10
Available capacity can produce ,000 units ,000 units
Projected Income Statement for next year
Sales: 20,000 x Rs Rs.800,000
6,000 x Rs Rs.300,000
Less: Marginal cost: 20,000 x Rs ,000
6,000 x Rs ,000
(Fund) net contribution Rs.200, Rs.180,000

14. Question:
Assume that the RA & RB Manufacturing Company produces and sells three products: The income statement at the end of Period 7 appears below:
Management is considering dropping product F because it believes that it has reduced profits by Rs. 3,000. Management believes that by an intensive sales campaign of Rs. 50,000 per annum it could drop product F and sell 2,000 additional units of product S.
The Company would save the separable fixed costs if product F is dropped. Would you advise the company to do this? F S N
Total
Sales (units)
1,000
2,400
3,200 -
Sales value per unit
Rs. 80
Rs. 48
Rs. 40
Variable cost per unit
Rs. 24
Rs. 16
Contribution margin per unit
Contribution fund 32
Rs.32,000 24
Rs.57,600
Rs.76,800
Rs.166,400
Fixed costs
Separable
Rs.25,000
Rs.10,000
Rs.20,000
Rs. 55,000
Joint (Allocated on value basis)
Rs.24,000
Rs. 66,000
Net Profit
Rs.(3,000)
Rs.23,600
Rs.24,800
Rs. 45,400

15. F S N
Total
Sales (units) -
4,400
3,200
Contribution per unit
Rs. 24
Total Contribution
Rs. 105,600
Rs.76,800
Rs.182,400
Separable fixed costs
10,000
20,000
30,000
Advertising
50,000
Joint fixed costs
24,000
32,000
56,000
Allocated fixed costs apportioned to F
Rs.(10,000)
Rs. 21,600
Rs.24,800
Rs. 36,400
It is better to leave things as they are. The adoption of the proposal would lead to a drop in profits of Rs. 45,400 – Rs. 36,400 = Rs. 9,000.