E-Commerce and Inventory Management

DEXTER LIMITED

Dexter limited produces and sells a single product, a wooden hand look for weaving small items such as scarves. Selected cost and operating data relating to the product for two years are given below:

£

Selling price per unit 50

Manufacturing costs:

Variable per unit produced:

Direct materials 11

Direct labour 6

Variable overhead 3

Fixed overhead per year 120,000

Selling and administrative costs:

Variable per unit sold 4

Fixed per year 70,000

Year 1 Year 2

Units in beginning inventory 0 2000

Units produced during the year 10000 6000

Units sold during the year 8000 8000

Units in ending inventory 2000 0

Members of the board of directors are confused about the approach they should use in ascertaining the cost of each product having just attended a course on costing methods where marginal costing and absorption costing methods were covered. They have particularly been confused about concepts such as ‘operating gearing’, ‘direct and indirect costs’ and ‘fixed and variable costs’.

Part 1

You have been asked to prepare a report that will explain the above concepts as clearly as possible for presentation at the board of directors’ meeting scheduled for June 2012.

Your report which should make use of the above figures should also include and integrate the