VU-MCS-MIT Solution of Graded Discussion BOARD (GDB) NO.1 MGT402 Cost & Management Accounting For Semester Fall 2012

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 under utilization 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.

Solution

First Understand the Variable cost and fixed cost

Variable cost

A periodic cost is cost that varies in step with the output or the sales revenue of a company.

Variable costs include raw material, energy usage, labor, distribution costs, etc. Companies with high variable costs are significantly different from those with high fixed costs.click here to read more

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