Uzma Bike Company Case Study

an accounts assistant at the Uzma Bike Company, you are asked to:

1. calculate the marginal cost of producing each bike

2. show the expected contribution per bike

Prepare a marginal costing statement to show clearly the total contribution and the total profit each week:

Solution:

Marginal cost per bike

Variable costs per unit: AED

Direct materials (4,000 + 100) 40

Direct labour (5,000 + 100) 50

Production overheads (3,000* + 100) 30

Marginal cost per bike 120

* 5,000 - 2,000 fixed costs

Contribution

Absorption costing answers the question, ‘What does it cost to make one unitof output?’

The absorption cost of a unit of output is made up of the following costs: AED

Direct materials x

{Add}Direct labour

Standards are set against which actual costs are compared, in order to determine variances from the standard. Unfavorable variances can be investigated in order to determine possible explanation for the deviation. In this manner, problem areas may be detected and dealt with expediently. However, the benefit to be derived from a standard costing system must always be weighed against the cost of establishing it. Hence, one may discover that while standard costs may be effectively and efficiently employed within a small manufacturing firm, the relative costs of setting-up and implementing such a system for a local bakery may be