MGT402 GDB 1 Solution 2012

Topic to be tested:

 Cost behaviors

Learning objectives:

 To learn about the behavior of variable and fixed cost in total and in per units basis.

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.



Important Instructions:

1. Your discussion must be based on logical facts.

2. The GDB will remain open for 2 working days/ 48 hours.

3. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.

4. Obnoxious or ignoble answer should be strictly avoided.

5. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

For Detailed Instructions please see the GDB Announcement

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SOLUTION

In my point of view Mr. C thinking is right but there statement logic is wrong. When the plant production capacity increased the finish product price is reduced. Because when production capacity increases then variable cost per unit is decreased but in the same time fixed cost also decreased but profit margins increase not decrease. I think Mr. A and Mr. B should go with the Mr. C them thinking right. If production capacity increase variable cost increase such as raw material etc. and fixed cost same like labors, salaries but total product cost decreased and profit increase.   

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Mr. c is wrong because wo keh raha hai k variable cost vary krti hai, according to hand outs, variable cost same rehti hai, total variable cost vary karti hai.
"The variable cost per unit is the same amount for each unit produced whereas total variable cost increases as volume of output increases."
fixed cost tk he is right, but variable cost per unit same rehti hai. however total variable costs increase kare ge with production, since input ziada hoga (raw material).