- 20 Marks
MA – L2 – Q3 – Throughput Accounting
Calculate profit-maximizing output using marginal costing for two products with limited machine hours.
Question
A company based near the Blue River manufactures two products, Product A and Product B, on the same machines. Sales demand for the products exceeds the machine capacity of the company’s production department. The potential sales demand in each period is for 8,000 units of Product A and 12,000 units of Product B. Sales prices cannot be increased due to competition from other firms in the market. The maximum machine capacity in the production department is 32,000 hours in each period.
The following cost and profitability estimates have been prepared:
| Product A | Product B | |
|---|---|---|
| Sales price | GH¢22 | GH¢27 |
| Direct materials | 10 | 9 |
| Direct labour and variable overhead | 6 | 11 |
| Contribution per unit | 6 | 7 |
| Machine hours per unit | 1.5 | 2 |
Fixed costs in each period are GH¢90,000.
Required:
(a) Using marginal costing principles, calculate the profit-maximising output in each period, and calculate the amount of profit.
(b) Explain how throughput accounting differs from marginal costing in its approach to maximising profit.
(c) Use throughput accounting to calculate the throughput accounting ratio for Product A and for Product B. You should assume that the direct labour cost and variable overhead cost in your answer to part (a) is fixed in the short term.
(d) Using throughput accounting principles, calculate the profit-maximising output in each period, and calculate the amount of profit.
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