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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 underutilization 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.

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Replies to This Discussion

According to my knowledge  MR.C gave accurate proposal because, total fixed cost stay behind constant while per unit fixed cost will decrease with increase in production volume. And variable cost will also vary as per production volume. If variable cost increase then total cost also increase.

The GDB is not about the total Cost. its about the per unit cost.

so Mr.C is wrong

i am not agree with the satement given by Mr.C bcz when we talk about cost behavior per unit of production, variable cost per unit remains   constant.means that increase or decrease in production volume cause no change to the variable cost per unit.whereas fixed cost per unit decreases as the number of units produced increased and vise versa.According to this concept Mr.C gave a wrong statement that 

Variable cost varies on per unit of output produced, whereas fixed cost remains constant on per unit of output produced”.

Mr c is wrong because wo keh raha hai k variable cost vary krti hai, according to hand outs, variable cost same rehti hai, total variable cost vary karti hai. 
"The variable cost per unit is the same amount for each unit produced whereas total variable cost increases as volume of output increases."
fixed cost tk he is right, but variable cost per unit same rehti hai. however total variable costs increase kare ge with production, since input ziada hoga (raw material).

 

mr c is wrong becoze he tell about per unit cost not total cost




assalam o alikum r u sure tariq bcoz its create too much confusion n time is short

any body would explain the point that according to mr c 2 jitni output produced ho gi variable cost us ky mutabiq vary kry gi jabky fixed cost constant hi rhy gi per unit ky hisab sy
to yahan pe ab jabky MR C ky mutabiq agar plant ko madrenized kia jata hy to fixed cost per unit out put produced ky hisab sy constant rehy gi
agar kisi ko solid ans ka idea hy to just reason btaye k kun MR c is wrong i think it is true k costing mathod ko madrnized kry sy un ky un ky profit pe frq ni pary ga and according to MR A and B k agar wo koi aisa method adopt krty hain to un ki production cost high ho jaye gi ar is tra sy profit reduce.ab

Definition of 'Variable Cost'

A corporate expense that varies with production output. Variable costs are those costs that vary depending on a company's production volume; they rise as production increases and fall as production decreases. Variable costs differ from fixed costs such as rent, advertising, insurance and office supplies, which tend to remain the same regardless of production output. Fixed costs and variable costs comprise total cost.
FIXED COST
A cost that does not change with an increase or decrease in the amount 
of goods or services produced. Fixed costs are expenses that have to be 
paid by a company, independent of any business activity. It is one of 
the two components of the total cost of a good or service, along with 
variable cost.
ab in definations ky mutabiq koi btaye ga k k WHY MZR C IS WRONG

Mgt402 1st GDB idea 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. This difference affects the financial structure of the company as well as its pricing and profits. The breakeven point in such companies (in comparison with high fixed cost companies) is typically at a much lower level of output, but their marginal profit (rate of contribution) is also much lower.
Fixed cost
A periodic cost that remains more or less unchanged irrespective of the output level or sales revenue, such as depreciation, insurance, interest, rent, salaries, and wages.
While in practice, all costs vary over time and no cost is a purely fixed cost, the concept of fixed costs is necessary in short term cost accounting. Organizations with high fixed costs are significantly different from those with high variable costs. This difference affects the financial structure of the organization as well as its pricing and profits. The breakeven point in such organizations (in comparison with high variable cost organizations) is typically at a much higher level of output, and their marginal profit (rate of contribution) is also much higher.

agree with MR.C
Increasing production volume situation
per unit total
Fixed Cost Increase Constant
Variable Cost Constant Increase
Total Cost Decrease Increase
bhae production volume increase krne ki bat ho rahi hai to According to this table variable cost will remain the same and the profit will be increase.


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“Variable cost varies on per unit of output produced, whereas fixed cost remains constant on per unit of output produced”.
ye statement assignment mein just confuse krne k lye di hui hai yeh basic definition hain fixed and variable cost ki...scnerio mein just yeh pucha hai k agar production volume increase karein to?
just increasing production volume situation wala table dekhain and scnerio solve ker lein


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According to my knowledge MR.C gave accurate proposal because, total fixed cost stay behind constant while per unit fixed cost will decrease with increase in production volume. And variable cost will also vary as per production volume. If variable cost increase then total cost also increase.

=================
i am not agree with the satement given by Mr.C bcz when we talk about cost behavior per unit of production, variable cost per unit remains constant.means that increase or decrease in production volume cause no change to the variable cost per unit.whereas fixed cost per unit decreases as the number of units produced increased and vise versa.According to this concept Mr.C gave a wrong statement that 
“Variable cost varies on per unit of output produced, whereas fixed cost remains constant on per unit of output produced”.

Im agreed with Mr. C because he is talking about total cost. Read his statement again.

i agree with MR.C because in this Scenario MR.A and MR.B are Hesitate due to reduction in profit and Cost of Goods produced may be increased.
now this table give you full idea...
Increasing Production Volume Situation

  • per Unit
  • Total
  • Fixed Cost
  • Decrease
  • Constant
  • Variable Cost
  • Constant
  • Increase
  • Total Cost
  • Decrease
  • Increase


From the above tables you can easily understand that, in case of production volume increased the fixed cost remains same in total and decreased in per unit basis, while variable cost is remains same on per unit basis and increased in total

thank God ye just 3 marks ka hai now time finished Allah tawakkal jo samajh araha hai likh do 3 no. mil gaye ya to gaye.

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