Written Questions Flashcards
Why have you chosen this production plan, and what would happen if the company went with a different plan?
The company’s aim is to maximise profit and as fixed costs remain constant the aim will be to maximise contribution.
To make the total sales demand they would need x kgs/ hrs of material/ labour, that they do not have.
As material/ labour hours are the limiting factor they must make the best use of these. X is the best use of the limiting factor and so these should be made first.
The plan recommended will yield the greatest contribution, any other plan would reduce the overall contribution.
They may consider this if a major customer requests the other product, to ensure that they keep the customer happy in the long term.
Problems of switching from absorption costing to activity based costing
The problems the company could have all relate to the complexity of activity based costing.
ABC can be time consuming and costly, and the benefits may not justify the costs.
ABC will be of limited benefit if the overhead costs are primarily volume related or a small portion of the overall cost.
It it impossible to allocate all overheads to specific activities.
The choice of both activities and cost drivers may be inappropriate.
