Cash Flows Case
Net income would be increased by ÂŁ1,200 if the order were taken.
Differential cash flows include:
Sales
Direct material
Direct labor
Variable portion of overhead
Non Differential cash flows….
Fixed overhead is assumed to be fixed for this special order (no additional equipment, no additional supervision, no additional building, no additional heating of building)….
To calculate variable overhead:
Total Overhead ÂŁ400,000
Less: Fixed overhead 160,000
Variable overhead ÂŁ240,000
Divided by DL cost
Which is the driver of
Overhead……………… 320,000
Gives an variable overhead application rate of 75% of Direct labor
Now ….FCFDAA
Alternatives
(1) (2)
With the Order No order
Sales
ÂŁ18,000
Direct material
5,600
Direct labour
6,400
Variable overhead
4,800
Fixed overhead
0
Total costs
16,800
Operating income
ÂŁ 1,200
IMPACT