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• In all the 3 cases the product cost for each product varies since the total over head cost is now distributed
amongst the 3 products using different techniques
• In the transaction based costing system which seems to be the latest trend as per John the overhead cost are
distributed amongst the product based on no. of transactions required to manufacture each.
• As we can see, since the no of transactions needed to manufacture flow controllers is the highest, the overheads
cost in accordingly distributed with the highest breakup falling unsder flow controllers, thus making it the
costliest amongst the 3 products
Q3 : Strategic implications
Currect SP 57.78 81.26 97.07 Why the market is able to offer pumps at a
Manufacturing Cost as per transactional significantly lower rate.
37.81 48.82 100.48
method
Why there is no competition in Flow
Standard Unit Cost (Direct Labour Method 37.56 63.12 56.5
Controllers even when Destin had increased
Revised Unit Cost (Machine Hour Method) 49 58.95 47.96 the price by 12.5%, infact keeping a 35%
margin they were selling it at a loss of $38.58.
Gross Margins @ transactoinal costing 35% 40% -4%
Target Price as per transactional costing
51.04 65.90 135.65
(Margin@35%)
Revenue %age 21% 55% 24%
*Assuming all companies are following transaction cost accounting
Q4 : Comparison of Net-Income across the 3 costing methods
Standard Costing System
Type Actual S.P/Unit Unit Cost Profit/Unit Units Produced Gross Margin Net Income
Valves 57.78 37.56 20.22 7500 35% 151650 We see that there is hardly any
Pumps 81.26 63.12 18.14 12500 22% 226750 change in net income in the 3
Flow Controllers 97.07 56.5 40.57 4000 42% 162280 accounting methods but each
Total Net Income 540680 costing method adopted has its
own significant impact on the
Revised Costing System(Machine Hours) pricing strategy of the products
Type Actual S.P/Unit Unit Cost Profit/Unit Units Produced Gross Margin Net Income which is vital to gain competitive
Valves 57.78 49 8.78 7500 15% 65850 Market Advantage/Market Share
Pumps 81.26 58.95 22.31 12500 27% 278875
Flow Controllers 97.07 47.96 49.11 4000 51% 196440
Total 541165