- 18 Marks
MA – Nov 2018 – L2 – Q3b – Relevant cost and revenue
Analysis of machine utilization, identification of bottlenecks, and comparison of marginal costing versus throughput accounting in a production setting.
Question
KYC Ltd makes three products: Hand Chew (HC), Yogurt Swallow (YS), and Canned Lick (CL). All three products are sold as a package and so are offered for sale each month to be able to provide a complete market service. The products are fragile, and their quality deteriorates rapidly once they are manufactured. The products are produced on two types of machines and worked on by a single grade of direct labour. Five direct employees are paid GH¢8 per hour for a guaranteed minimum of 160 hours each per month. All of the products are first molded on machine type 1 and then finished and sealed on machine type 2. The machine hour requirements for each of the products are as follows:
| Product | Machine Type 1 (Hours/Unit) | Machine Type 2 (Hours/Unit) |
|---|---|---|
| HC | 1.5 | 1 |
| YS | 4.5 | 2.5 |
| CL | 3 | 2 |
The capacity of the available machines type 1 and 2 are 600 hours and 500 hours per month respectively. Details of the selling prices, unit costs, and monthly demand for the three products are as follows:
| Product | HC (GH¢/Unit) | YS (GH¢/Unit) | CL (GH¢/Unit) |
|---|---|---|---|
| Selling price | 91 | 174 | 140 |
| Component cost | 22 | 19 | 16 |
| Other direct material cost | 23 | 11 | 14 |
| Direct labour cost at GH¢8 per hour | 6 | 48 | 36 |
| Overheads | 24 | 62 | 52 |
| Profit | 16 | 34 | 22 |
Maximum monthly demand (units):
- HC: 120
- YS: 70
- CL: 60
Although KYC Ltd uses marginal costing and contribution analysis as the basis for its decision-making activities, profits are reported in the monthly management accounts using the absorption costing basis. Finished goods (inventories) are valued in the monthly management accounts at full absorption cost.
Required:
i) Calculate the machine utilization rate per month for each machine and explain which of the machines is the bottleneck/limiting factor. (4 marks)
ii) Using the current system of marginal costing and contribution analysis, calculate the profit-maximizing monthly output of the three products. (5 marks)
iii) Explain why throughput accounting might provide more relevant information in KYC’s circumstances. (4 marks)
iv) Using a throughput approach, calculate the throughput-maximizing monthly output of the three products. (5 marks)
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