KOM Ltd. have just completed their annual budget for 2012. They have two products, KOM Standard and KOM Expert. The budget is given in table 1 below, and is based on a total production and sales level of 1000 units of Standard and 500 units of Expert.
KOM Standard KOM Expert Total
Sales 12.000.000 6.000.000 18.000.000
Direct material cost 6.000.000 4.000.000 10.000.000
Direct labour cost 2.000.000 1.000.000 3.000.000
Indirect production
cost 2.000.000
Indirect logistics cost 1.000.000
Total production cost 16.000.000
Indirect sales/Admin
cost 1.500.000
Profit 500.000
Table 1
a) Explain why they haven’t budgeted the indirect cost per product, only the total indirect cost.
b) Calculate all the indirect allocation rates when you are given information that the production department uses direct materials as the allocation basis, direct labour cost is used in the logistics department and total production cost is used in the sales/admin department.
c) Assume that the indirect costs consist of 50% fixed and 50% variable costs in all departments. Debate what the lowest selling price should be under various conditions for the product Standard.
d) Towards the end of 2012 KOM find out that the level of activity is going to be lower than budgeted. They are expecting to reach sales of only 800 units of Standard and 300 units of Expert for the year 2012. Calculate their projected total profit for 2012.