Cost Accounting

1
Definition

Chartered Institute Of Management

Accountants ( CIMA London )

Costing is the technique and process of

ascertaining cost

2
Cost Accounting

Cost accounting measures and reports information

relating to the cost of acquiring and utilizing
resources
Cost accounting provides information for
management and financial accounting
Cost management describes the approaches and
activities of managers in short-run and long-run
planning and control decisions
These decisions increase value of customers and
lower costs of products and services
Cost management is an integral part of a companys
strategy
3
Cost Accounting

It provides information for both management

accounting and financial accounting.
It measures and reports from financial
and non financial data.

4
Financial Accounting

Financial accounting measures and records business

transactions and provides financial statements that
are based on generally accepted accounting
principles (GAAP)
Managers are responsible for the financial statements
issued to investors, government regulators, and other
parties outside the organization
Financial accounting focuses on external parties
Financial accounting reports on what happened in the
past

5
An Introduction to Cost Terms

6
Costs and Cost Objects

Cost
a resource sacrificed or foregone to achieve a specific
objective

Cost Object
any product, machine, service or process for which
cost information is accumulated
cost objects can vary in size from an entire company,
to a division or program within the company, or down
to a single product or service

7
Direct and Indirect Costs
Direct Cost
a cost which is related to a particular cost objective
and can be traced to it in an economically feasible way
Indirect Cost
a cost which is related a particular cost objective but
cannot be traced to it in an economically feasible way
indirect costs are allocated to cost objectives

Direct Trace
Cost Cost
Object
Indirect
Allocate
Cost
8
Cost Drivers and Cost Management

Cost driver (cost generator or cost determinant)

a factor which causes the amount of cost incurred to
change
production costs are driven by the number of
products produced, labour costs, number of setups
required, and the number of change orders

Cost Reduction Programs focus on two things:

1. Doing only value-added activities
2. Efficiently manage the use of cost drivers in those
value-added activities

9
Variable and Fixed Costs

Variable Cost
a cost which is constant per unit R
s
but changes in total in proportion
to changes in the output
materials (parts), fuel costs for a
trucking company
Volume

Fixed Cost R
a cost which does not change in s
total as volume changes but
changes on a per-unit basis as the
cost driver increases and decreases
amortization, insurance Volume

10
Total Costs and Unit Costs

Unit Cost (or Average Cost)

Total cost / some number of units

Average cost
= Total manufacturing costs / Number of units produced
= Rs980,000 / 10,000
= Rs98 per unit

Unit or average costs must be interpreted with caution

As volume increases, the unit or average cost falls as
the fixed costs are spread over a larger number of
units
11
Types of Inventory

Direct material inventory (stock awaiting use in the

manufacturing process)

Work-in process inventory (partially completed goods

on the shop floor)

Finished goods inventory (goods completed but not

yet sold)

12
Period and Product Costs

Period Costs
are expensed on the income statement as they are
incurred
also called operating costs (excluding cost of goods
sold)
examples: selling, general and administrative costs

Product Costs
are inventoried on the balance sheet and expensed
only when the product or service is sold
also called inventoriable costs
Examples: materials and labour (manufacturing)
13
Costing System Terminology
Cost Object
anything for which a separate measurement of costs
is desired

Cost Pool
a grouping of individual cost items

Cost Allocation Base

a factor that is the common denominator for
systematically linking an indirect cost or group of
indirect costs to a cost object

14
Alternative Classifications of Costs

1. Business function 3. Behaviour pattern

a. R&D a. Variable costs
b. Design b. Fixed costs
c. Production
d. Marketing 4. Aggregate or average
e. Distribution a. Total costs
f. Customer service b. Unit costs

5. Assets or expenses
2. Assignment to a cost
a. Inventoriable costs
object
b. Period costs
a. Direct costs
b. Indirect costs
15
Costs in a Manufacturing Company
Balance Sheet
Direct Income Statement
Materials
Material
Inventory
Purchases
Revenue
Direct Work in Finished
Labour Process Goods Cost of Goods Sold
Inventory Inventory
Indirect
Manufacturing Gross Margin
Costs
Period Marketing and
Inventoriable Costs Administrative Costs
(Product)
Costs Operating Income
16
Costing Systems

Job-Costing Process-Costing
System System
Costs are assigned to a Costs are assigned to
distinct unit or batch a mass of similar units
Resources are Resources are used to
expended to bring a mass-produce a
distinct product or product or service and
service to market for a not for any specific
specific customer customer
advertising campaign, Postal delivery, oil
audit, aircraft assembly refining
17
Job Costing Approach
1. Identify the cost object(s)
2. Identify the direct costs for the cost object(s)
3. Select cost-allocation bases to use in allocating the
indirect costs to the cost object(s)
4. Identify the indirect costs associated with each
cost-allocation base
5. Compute the rate per unit of each cost-allocation
base to allocate indirect costs to the cost object(s)
6. Compute the indirect costs allocated to the cost
object(s)
7. Determine the cost of the cost object(s) by adding
the direct and indirect costs
18
Job Costing Overview

Indirect Manufacturing Overhead

Cost Pool Rs1,215,000

Cost 27,000 Direct Manufacturing

Allocation Base Labour-Hours

Rs45 per direct

Manufacturing Labour Hours

Cost Object:
Direct Material
Direct + Indirect Costs
Direct Labour
19
Job Costing System in Manufacturing

Buy
Materials

Materials Work-In-Process Finished Goods Cost of

Inventory Inventory Inventory Goods Sold
Use Complete Sell
Materials Production Goods

Incur Labour
Costs

Incur Overhead
Costs

20
Cost Sheet

21
Cost Sheet
It is a statement designed to show the output of
a particular accounting period along with
breakup of cost.
It is a memorandum statement
It does not form part of double entry cost
accounting records.
It discloses the total cost and cost per unit.
It helps
To fix Selling Price.
To submit quotation price.
To Control cost.
22
 COST SHEET

Total Cost Cost Per unit

Direct Materials
Direct Labour
Prime Cost
Add: Works Overheads
Works Cost
Add: Administration overheads
Cost of Production
Add: Selling & Distribution Overheads
Total Cost or Cost of Sales

23
 Elements of Cost

Direct Material :-
Identify in the product
Easily measure & directly charge to the product
e.g. Timber in furniture making
Categories
raw material
Specifically purchased for specific job or process
Parts or components purchased.
e.g. tyres for cycles
Primary Packing material
to protect finished product
for easy handling inside the factory.
24
Direct Labour :-
Labour engaged in
converting raw material into finished goods
Altering the construction
Actual Production
Composition of Product
i.e labour which can be attributed to a particular job,product
or process
Exception :- Where the cost is not significant like
wages of trainees- their labour though directly
spent on product is not treated as direct Labour
Test:-
Easily Identify
Feasible to Identify
25
Overheads :- It may be defined as the aggregate of the cost of
indirect materials, indirect labour and such other expenses
including services as cant conveniently be charged direct
to specific cost unit.
Categories:-
Manufacturing Overheads
Administration of machines
Selling & distribution of machines

26
Standard Costing

27
Why is Standard Costing Used?

A standard is a preestablished
benchmark for desirable performance.

A standard cost system is one in which a

company sets cost standards and then
uses them to evaluate actual performance.

A variance is the difference between

actual performance and the standard.
28
Favorable versus Unfavorable

A standard is a preestablished
benchmark for desirable performance.

An unfavorable variance occurs when actual

performance falls below the standard.

29
 . Standard cost is the Predetermined cost
based on a technical estimate for material, labor and
overhead for a selected period of time
and for a specified set of working conditions.

Standard costing is the preparation of standard cost and

applying them to measure the variations from actual
costs and analyzing the causes of variations with a view
to maintain maximum efficiency in production
30
Quantity and Price Standards

What can cause a cost to increase?

Quantity used

Price paid

31
Ideal versus Practical Standards

A standard that allows for no inefficiencies

of any kind is an ideal standard.

A standard that allows for the normal

inefficiencies of production is
called a practical standard.

32
The Standard Costing Process

Gather information Investigate the

and set standards. cause of variances.

Compare actual
Determine if
performance to
corrective action
standard and prepare
is needed.
performance reports.

Determine which
Take corrective action.
variances to investigate.
33
Problems With Standard Costing

Employees may try to set low standards

to make them easier to achieve.

Using historical data to set standards

may build in past inefficiencies.

Managers might focus on the

numbers to the exclusion
of other important factors.
34
Problems With Standard Costing

Focus on unfavorable variances

may result in ignoring the
favorable variances.

Managers may lose

sight of the big picture.

35
Comparison of Cost Systems

Actual Normal Standard

Cost
Cost Cost Cost
Classification
System System System
Direct
Actual Actual Estimated
Material
Direct
Actual Actual Estimated
Labor
Manufacturing
Actual Estimated Estimated
Overhead
36
Analysis of variance

37
Analysis of Variance
Analysis of Variance may be done in
respect of each element of cost and sales:
1.Direct Material Variance
2.Direct Labor Variance
3.Overhead Variance
4.Sales Variance

38
Material Variances

Material Cost Variance:

(Standard Price x Standard Rate)

- ( Actual quantity x Actual Rate )

39
Direct Materials Variances

There are two variances calculated

for material cost variance.

The material quantity variance

(also called the usage variance) is a
measure of the amount of materials used.

The material price variance

is a measure of the cost to buy the
various materials that were purchased.
40
Material Variances

Material price variance:

( Standard material price

Actual material price)
Actual material quantity

Material quantity variance:

( Standard material quantity

Actual material quantity)
Standard unit price
41
Direct Materials Variances

Again Material Qt variances can be

divided into two varainces

The material mix variance

.

The material Yield variance

42
Material Mix Variances

Actual weight do not differ

Standard Cost of Standard Mix

Standard Cost of Actual Mix
Std. Unit cost (SQ AQ)

43
Material Mix Variances

Actual weight differ

Total wt. Of actual mix X Std. Cost - Std. Cost

Total wt. Of standard of Std. Mix of actual mix
mix

44
Material Variances

Material yield variance:

Standard Rate (Actual Yield

Standard Yield )
{If std. & actual mix are same}

Standard Rate = Std. Cost of Std. Mix

Net Std. Output
(Gross output Standard loss)
45
Material yield Variances

{Standard Rate (Actual Yield

Revised Standard Yield )
If std. & actual mix are not same}

Standard Rate = Std. Cost of Revised Std. Mix

Net Std. Output
(Gross output Standard loss)

46
Labor Variances

The labor cost variance is the

difference between actual cost of hour
worked and the standard cost allowed.

The labor rate variance is the

difference between the actual direct
labor cost incurred and the standard
cost for the actual hours worked.

47
Labor variance:

Labor Cost Variance

St. Cost of labor Actual cost of labor

Labor Rate Variance

Rate variance =Actual Time
Taken (Standard Rate
Actual Rate)
48
Total Labor Efficiency Variance

Standard Rate (Standard time for actual

Output - Actual time Paid for)

49
Labor Variances

Total Labor efficiency variance are of two types

Labor Efficiency Variance

Labor Idle Time variance

50
 Labor Variances

Labor Efficiency Variance

Labor Efficiency Variance = Standard rate(Standard time

for actual output - Actual time worked)

51
Labor Variances

Labor Idle Time variance

Labor Idle Time variance = Abnormal Idle Time x

Standard Rate

52
Labor Variances

Labor Mix Variance

St. Cost of St Composition
(Actual time taken) Standard cost of actual
Composition ( Actual time worked)

53
Labor Variances

Labor Yield Variance

Standard Rate
(Actual Yield Revised
Standard Yield)

54
Overhead Variance:

Overhead cost variance can be

defined as the difference between
the Standard cost allowed for the
actual output achieved and the
actual overhead cost incurred.

55
Overhead :- According to terminology of
cost Accountancy (ICWA London)
Overhead is defined as The aggregate of
indirect material cost, indirect wages
(indirect Labor Cost) and indirect
expenses.

56
Overhead Costs

Overhead costs are significant for most

organizations
Variable Overhead
Recall that variable overhead is allocated to
products and services using a budgeted variable
overhead rate
Fixed Overhead
Recall that fixed overhead is allocated to products
and services using a budgeted fixed overhead rate

57
Overhead Cost Variances

Variable Overhead Fixed Overhead

How the Rs Rs
Cost is
Planned
and
Controlled
Volume Volume

How Costs Rs Rs
are
Allocated
to
Products
Volume Volume
58
Overhead cost Variance:-

Overhead Cost Variance

Variable overhead variance Fixed overhead

variance

Expenditure Efficiency Expenditure Volume

variance variance variance variance

Capacity Calendar Efficiency

variance variance variance
59
Overhead Cost Variance :-

Overhead Cost Variance

( Actual output x Standard overhead Rate per unit )

Actual overhead cost

60
Overhead Cost Variances

Overhead Cost variances can be

divided into two varainces

1. Variable Overhead variance

.
2. Fixed Overhead variance

61
Variable Overhead Variance

1. Variable Overhead variance

(Actual output x Standard variable overhead rate)

(Actual variable overheads)

62
Variable Overhead Variances

Variable Overhead variances can be

divided into two variances

1. Variable Overhead Expenditure variance

.
2. Variable Overhead Efficiency variance

63
(A) Variable overhead (spending) expenditure

variance
= (Actual hours worked x standard variable
overhead rate) Actual variable overheads

(B) Variable overhead efficiency variance

= Standard variable overhead rate(standard
Hours for Actual output Actual Hours)

64
2. Fixed overhead variance

Fixed overhead variance

(Actual output x standard fixed overhead rate)
Actual fixed overheads

Fixed overhead variance can be categorized into:-

a) Expenditure variance = Budgeted Fixed overheads

Actual fixed overheads

b) Volume variance = actual output x Standard rate

Budgeted fixed overheads

65
b) Capacity variance= standard rate( Revised
Budgeted units Budgeted units)

c) Calendar variance
= (Decrease or increase in number of units
produced due to the difference of budgeted and
actual days x standard rate per unit)

e) Efficiency Variance = Standard Rate (Actual

Production Standard Production)

66
Using Standard Cost Variances

A performance report should be prepared

on a periodic basis for the managers
who are responsible for the
standard cost variances.

The management by exception concept

would then be used by the managers
to focus their attention on the most
significant cost variances.
67
Marginal Costing

68
Marginal Costing:-

Chartered Institute of Management Accountant,

England-

Marginal costing is the ascertainment of

marginal cost and of the effect on profit of
changes in volume or type of output by
differentiating between fixed cost and variable
costs.

69
Features of Marginal Costing:

Cost is classified into :

Fixed Cost
Variable Cost
Variable cost is only charged to production
Fixed cost is recovered from contribution
Valuation of stock of WIP and F.G. is done on the basis
of marginal cost.
Selling price is based on marginal cost and
contribution
It is technique used to ascertain the marginal cost & to
know the impact of V.C. on volume of output
Profit is calculated by deducting marginal cost and
fixed cost from sales
70
C-V-P analysis is one of integral part of marginal
Costs

Fixed (Indirect/Overheads) are not influenced by the

quantity produced but can change in the long run e.g.,
insurance costs, administration, rent, some types of
labour costs (salaries), some types of energy costs,
equipment and machinery, buildings, advertising and
promotion costs.
Variable (Direct) vary directly with the quantity
produced, e.g., raw material costs, some direct labour
costs, some direct energy costs.
Semi-fixed Where costs not directly attributable to
either of the above, for example some types of energy
and labour costs.
71
Costs

Total Costs (TC) = Fixed Costs (FC)+ Variable

Costs (VC)

Average Costs = TC/Output (Q)

AC (unit costs) show the amount it costs to produce
one unit of output on average

Marginal Costs (MC) the cost of producing one

extra or one fewer units of production
MC = TCn TCn-1

72
 Revenue

Total Revenue also known as turnover,

sales revenue or sales = Price x
Quantity Sold
TR = P x Q
Price may be a variety of different
prices for different products in the
portfolio
Quantity Units sold

73
Profit

Profit = TR TC
Normal Profit the minimum amount
required to keep a business in a
particular line of production
Abnormal/Supernormal Profit the amount
over and above the amount needed to
keep a business in its current line of
production

74
Marginal Cost Equation

Sales = Variable Cost + Fixed Cost + Profit/Loss

Sales - Variable Cost = Fixed Cost + Profit/Loss

Sales - Variable Cost = Contribution

Therefore,
Contribution = S.P. V.C. or
Contribution = Fixed Cost + Profit

75
Cost-Volume-Profit
(CVP) Analysis

76
Cost volume Profit Analysis

Cost volume Profit Analysis is a logical

extension of marginal costing
C.V.P. analysis examines the relationship
of cost & profit to the volume of business
to maximize profits
Indicates direct relationship between
volume & profit
Indicates Indirect relationship between
volume & cost per unit (Inverse)
77
Cost-Volume-Profit Assumptions
and Terminology

1. Changes in the level of revenues and costs arise

only because of changes in the number of product
(or service) units produced and sold.
2. Total costs can be divided into a fixed component
and a component that is variable with respect to
the level of output.

78
Cost-Volume-Profit Assumptions
and Terminology

3. When graphed, the behavior of total revenues

and total costs is linear (straight-line) in relation
to output units within the relevant range
(and time period).

4. The unit selling price, unit variable costs, and

fixed costs are known and constant.

79
Abbreviations

SP = Selling price
VCU = Variable cost per unit
CMU = Contribution margin per unit
CM% = Contribution margin percentage
FC = Fixed costs

80
Abbreviations

Q = Quantity of output units sold

(and manufactured)
OI = Operating income
TOI = Target operating income
TNI = Target net income

81
Breakeven Point

Variable Fixed
Sales expenses = expenses

Total revenues = Total costs

82
Break Even

Point of No Profit and No Loss

Occurs where Total Costs = Total Revenue

Fixed Costs
Break-Even Point = ---------------
Contribution

83
 Cost-Volume-Profit Assumptions
and Terminology
Break even point ( Rs ) =Fixed Cost / P/V ratio

Break Even point (Units) = Fixed Cost (Total)

-----------------------------
(S.P per unit M.C per unit)
or( Contribution per Unit)

P/V Ratio = Profit / Sales

P/V Ratio = Contribution / Sales
84
Cost-Volume-Profit Assumptions
and Terminology

Value of sales to earn desired amount of

profit:-

(Fixed Cost + Desired Profit)

------------------------------------------
P/ V ratio

85
Cost-Volume-Profit Assumptions
and Terminology
Variable Cost = Sales (sales x P/V ratio)

Profit= (sales x P/V ratio) Fixed Cost

Fixed Cost= (sales x P/v ratio) Profit

Margin of safety =
(Rs) = Profit/ P/V ratio or
= Actual sales Break Even Sales
(Units) = Profit / Contribution per unit
86
Essentials of Cost-Volume-Profit
(CVP) Analysis Example

Assume that the Furniture Shop can purchase

Chairs for Rs32 from a local factory; other
variable costs amount to Rs10 per unit.
The local factory allows the Furniture Shop to
return all unsold Chairs and receive a full Rs32
refund per pair of Chairs within one year.
The average selling price per pair of Chairs is Rs70
and total fixed costs amount to Rs84,000.
87
Essentials of Cost-Volume-Profit
(CVP) Analysis Example

How much revenue will the business receive if

2,500 units are sold?
2,500 Rs70 = Rs175,000
How much variable costs will the business incur?
2,500 Rs42 = Rs105,000
Rs175,000 105,000 84,000 = (Rs14,000)
88
Essentials of Cost-Volume-Profit
(CVP) Analysis Example

What is the contribution margin per unit?

Rs 70 Rs 42 = Rs 28 contribution margin per unit
What is the total contribution margin when
2,500 pairs of Chairs are sold?
2,500 Rs 28 = Rs70,000

89
Essentials of Cost-Volume-Profit
(CVP) Analysis Example

Contribution margin percentage (contribution

margin ratio) is the contribution margin per
unit divided by the selling price.
What is the contribution margin percentage?
Rs28 Rs70 = 40%

90
Essentials of Cost-Volume-Profit
(CVP) Analysis Example

If the business sells 3,000 pairs of Chairs,

revenues will be Rs 210,000 and contribution
margin would equal 40% Rs 210,000
= Rs 84,000.

91
Equation Method

(Selling price Quantity sold) (Variable unit cost

Quantity sold) Fixed costs = Operating income
Let Q = number of units to be sold to break even
Rs70Q Rs42Q Rs84,000 = 0
Rs28Q = Rs 84,000
Q = Rs84,000 Rs28 = 3,000 units

92
Contribution Margin Method

Rs84,000 Rs28 = 3,000 units

Rs84,000 40% = Rs210,000

93
Graph Method

Breakeven
378
336
294 n u e
ev e
252 R ts
$(000)

210 l c o s
168 Tota
126
84 Fixed costs
42
0
0 1000 2000 3000 4000 5000
Units
94
Target Operating Income

(Fixed costs + Target operating income)

divided either by Contribution margin
percentage or Contribution margin per unit

95
Target Operating Income

Assume that management wants to have an

operating income of Rs 14,000.
How many pairs of Chairs must be sold?
(Rs84,000 + Rs14,000) Rs 28 = 3,500
What sales are needed to achieve this income?
(Rs84,000 + Rs14,000) 40% = Rs245,000
96
 Target Net Income
and Income Taxes Example

Proof:
Revenues: 4,822 Rs70 Rs337,540
Variable costs: 4,822 Rs42 202,524
Contribution margin Rs135,016
Fixed costs 84,000
Operating income 51,016
Income taxes: Rs51,016 30% 15,305
Net income Rs 35,711
97
 Alternative Fixed/Variable Cost
Structures Example

Suppose that the factory the Chairs Shop is using to

obtain the merchandise offers the following:
Decrease the price they charge from Rs32 to Rs25 and
charge an annual administrative fee of Rs30,000.
What is the new contribution margin?

98
Alternative Fixed/Variable Cost Structures
Example

Rs70 (Rs25 + Rs10) = Rs35

Contribution margin increases from Rs28 to Rs35.
What is the contribution margin percentage?
Rs35 Rs70 = 50%
What are the new fixed costs?
Rs84,000 + Rs30,000 = Rs114,000
99
Alternative Fixed/Variable Cost Structures
Example

Management questions what sales volume

would yield an identical operating income
regardless of the arrangement.
28x 84,000 = 35x 114,000
114,000 84,000 = 35x 28x
7x = 30,000
x = 4,286 pairs of Chairs
100
Alternative Fixed/Variable Cost Structures
Example

Cost with existing arrangement

= Cost with new arrangement
.60x + 84,000 = .50x + 114,000
.10x = Rs30,000 x = Rs300,000
(Rs300,000 .40) Rs 84,000 = Rs36,000
(Rs300,000 .50) Rs114,000 = Rs36,000
101
Contribution
. income statement emphasizes
contribution margin.
Financial accounting income statement
emphasizes gross margin.

102
Application Of Marginal Costing

1. Cost Control
2. Profit planning
3. Evaluation of performance
4. Decision Making
Fixation of selling Price
Key or limiting factors
Make or Buy Decision

103
Application Of Marginal Costing

Selection of suitable product mix

Effect of change in price
Maintained a desired level of Profit
Alternative methods of Production
Diversification of Products
Closing down of activities
Alternative course of action
Level of activity planning

104
Typical Relevant Costing Decisions

One-Time-Only Special Order (Pricing)

Make or Buy Decisions (Outsourcing)
Opportunity Costs
Product Mix Decisions under Capacity Constraints
Add or Drop a Product Line or Customer
Equipment Replacement Decisions

105
One-Time-Only Special Order

Without With
Order Order Difference

Volume 30,000 35,000 5,000

Relevant revenues Rs600,000 Rs655,000 Rs55,000

Relevant costs:
Variable
manufacturing (225,000) (262,500) (37,500)

Incremental income Rs17,500

106
Outsourcing and Make/Buy Decisions

Make Buy Difference

Relevant costs:
Outside cost of parts Rs160,000 Rs160,000
Direct materials Rs80,000 (80,000)
Direct labour 10,000 (10,000)
Variable overhead 40,000 (40,000)
Fixed purchasing,
receiving and
setup overhead 20,000 (20,000)

Incremental difference
In favour of making Rs10,000
107
Outsourcing and Opportunity Costs

Make Buy

Relevant cost to make Rs150,000

Relevant cost to buy Rs 160,000
Opportunity cost:
Profit forgone because
Capacity cannot be used
to make another product 25,000
Total relevant costs Rs175,000 Rs160,000

Opportunity cost considers the profits lost by not

following the next best alternative course of action
108
Product Mix Decisions Under Constraint

Snowmobile Boat
Engine Engine

Contribution margin per unit Rs240Rs375

Machine hours required per unit 2 5
Contribution margin per
machine hour Rs120Rs75

If machine hours are constrained, maximize income

by first producing as many snowmobile engines as
can be sold and then shift production to boat engines

109
Customer Profitability Analysis
Keep Drop
Account Account Difference

Relevant revenue Rs1,200,000 Rs800,000Rs(400,000)

Relevant costs:
Cost of goods sold 920,000 590,000 330,000
Material-handling labour 92,000 59,000 33,000
Marketing support 30,000 20,000 10,000
Order/delivery 32,000 20,000 12,000

Decline in operating income

if drop account Rs(15,000)

110