A company draws up the standard cost of a product as follows:
|
Rs |
Rs |
Rs |
|
|
Direct Materials |
12 |
||
|
Direct Wages: |
|||
|
Dept. A 3 hours |
15 |
||
|
Dept. B 2 hours |
12 |
||
|
Dept. C 5 hours |
20 |
47 |
|
|
Factory Overhead: |
|||
|
Dept. A |
18 |
||
|
Dept. B |
18 |
||
|
Dept. C |
40 |
76 |
|
|
Factory Cost |
135 |
||
|
Administration Cost |
12 |
||
|
Selling Cost |
15 |
||
|
Distribution cost |
18 |
||
|
Total |
180 |
||
|
Net Profit |
20 |
||
|
Selling Price |
200 |
Factory overhead is absorbed by means of departmental hour rates. Analysis of these overheads reveal that in each department a rate of Rs.2 per hour is required to absorb the variable portion, the balance being of a fixed nature. As a general rule, all production is of first class quality.
After a batch of 1,000 units has been processed through all three departments, inspection reveals that half are faulty. The faulty products can be rectified by completely re processing through departments B and C. Alternatively, they can be sold for Rs.20 each.
Present figures which indicate to management the most economic method of dealing with the faulty products.