Making Managerial Decision Essay

2553 Words11 Pages
To: Senior Management Team From: Gerald White and Accounting Team Date: Subject: A report detailing an analysis of costings and recommendations for Omar Khan’s prospective order, any strategic implications of recommendations made and possible benefits of considering alternative costing theories and models. 1. Analysis of Costing and Recommendations 1.1 Analysis of Costings under various methods In Appendices 1, 2, 3 and 4 is a spreadsheet detailing the data for Fast Clean Products’ current production, absorption costing and marginal costing for current production and the prospective Khan order, and contribution calculations for the prospective order. In this report we will be dealing with the average figures as the actual order figures may vary by 2%. The figures for all possibilities can be found in the Appendices. 1.1.1 Absorption Costing The average total cost of the Khan order under absorption costing is £446,107.82. 1.1.2 Marginal Costing The average cost of the Khan order under marginal costing is £300,000.00. 1.1.3 Contribution Costing The contribution generated by the order is calculated using various profit loading percentages including 10%, which is currently in use at Fast Clean Products. The contribution at this price is £190,718.66 but changes with the price set which will be discussed later. 1.2 Suitability of costing methods for the order In this section, the suitability of each costing method, with regard to the management decision as to whether or not take on the Khan special order, is discussed. 1.2.1 Absorption Costing Absorption costing would be suitable for use as the method includes all costs of production which makes it useful for pricing decisions. This is important in this case with Khan owning a chain of supermarkets which compete intensely on costs. However, only variable costs are

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