Accounting for Managers: Interpreting accounting information for decision-making

428 ACCOUNTING FOR MANAGERS

Strategy should be to shift sales mix as far as possible to Product A (highest contribution
per unit).

Absorption of overhead

See Table A2.20.
While there is not much difference between using sales value and equal allocations for
overhead, the volume method leads to lower costs for Products A and B and higher costs
for Product C. The important point here is that different methods of overhead allocation (of
the same value of overhead) can lead to different costs for products and services.

Breakeven

See Table A2.21.

Fixed costs £6, 900 , 000 404,218 units of volume

Contribution per unit £17.07

Maintaining the same sales mix, the breakeven sales units of each product are:

86 ,619 of A

115 ,490 of B

202 ,109 of C

Table A2.20

A B C Total

Absorption costs based on sales value 7,500,000 7,000,000 8,750,000 23,250,000
32.2% 30.1% 37.7%
Variable costs 3,000,000 3,400,000 4,900,000 11,300,000
Fixed expenses 2,221,800 2,076,900 2,601,300 6,900,000

Total costs 5,221,800 5,476,900 7,501,300 18,200,000
Cost per unit of volume £34. 81 £27. 38 £21. 43

Absorption costs based on volume 150,000 200,000 350,000 700,000
21.4% 28.6% 50%
Variable costs 3,000,000 3,400,000 4,900,000 11,300,000
Fixed expenses 1,476,600 1,973,400 3,450,000 6,900,000

Total costs 4,476,600 5,373,400 8,350,000 18,200,000
Cost per unit of volume £29. 84 £26. 87 £23. 86

Absorption costs based on equal
allocation
Variable costs 3,000,000 3,400,000 4,900,000 11,300,000
Fixed expenses 2,300,000 2,300,000 2,300,000 6,900,000

Total costs 5,300,000 5,700,000 7,200,000 18,200,000
Cost per unit of volume £35. 33 £28. 50 £20. 57