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Kubin Company’s relevant range of production is 18,000 to 22,000 units. When it produces and sells 20,000 units, its average costs per unit are as follows:
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Required:
1. Assume the cost object is units of production:
a. What is the total direct manufacturing cost incurred to make 20,000 units?
b. What is the total indirect manufacturing cost incurred to make 20,000 units?
2. Assume the cost object is the Manufacturing Department and that its total output is 20,000 units.
a. How much total manufacturing cost is directly traceable to the Manufacturing Department?
b. How much total manufacturing cost is an indirect cost that cannot be easily traced to the Manufacturing Department?
3. Assume the cost object is the company’s various sales representatives. Furthermore, assume that the company spent $50,000 of its total fixed selling expense on advertising and the remainder of the total fixed selling expense comprised the fixed portion of the company’s sales representatives’ compensation.
a. When the company sells 20,000 units, what is the total direct selling expense that can be readily traced to individual sales representatives?
b. When the company sells 20,000 units, what is the total indirect selling expense that cannot be readily traced to individual sales representatives?
♦ Relevant knowledge
A cost object could represent an object or department that a company wants to accumulate individual costs to. One of the major motives for naming an item as cost objects is to allow the business to identify individual costs and make decisions that are strategic, such as pricing for products or removing the department or product. When calculating the cost of a cost object companies must determine the difference between direct and indirect costs.
1a.
Direct materials per unit
7
Direct labor per unit
4
Direct manufacturing cost per unit
$11.00
Number of units sold
20000
Total manufacturing cost
$220000
1b.
Variable manufacturing overhead per unit
1.50
Fixed manufacturing overhead per unit
5.00
Indirect manufacturing cost per unit
$6.50
Number of units sold
20000
Total cost of indirect manufacturing
$130000
2a.
Direct materials per unit
7
Direct labor per unit
4
Variable manufacturing overhead per unit
1.50
Fixed manufacturing overhead per unit
5.00
Total manufacturing cost per unit
$17.50
Total number of units sold
20000
Total direct costs
$350000
2b.
Total indirect costs
$0
When the Manufacturing Department is the cost object, none of the manufacturing costs can be considered indirect costs.
3a.
Sales commissions per unit
1
Total number of units sold
20000
Total sales commission
$20000
Fixed percentage of sales reps’ compensation
20000
Total cost of direct selling
$40000
3b.
Total indirect selling cost
$20000
Total fixed percentage of sales reps’ compensation = Total fixed selling expenses = (3.50×20000) – 50000 = $20000
Advertising expenses cannot be traced back to sales reps.