Question

E19-6 PCB Corporation manufactures a single product. Monthly production costs incurred in the manufacturing process are shown below for the production of 3,000 units. The utilities and maintenance costs are mixed costs. The fixed portions of these costs are $300 and $200, respectively. Production in Units 3,000 Production Costs Direct materials $ 7,500 Direct labor 18,000 Utilities 2.100 Property taxes 1,000 Indirect labor 4,500 Supervisory salaries 1,900 Maintenance 1,100 Depreciation 2,400 Instructions (a) Identify the above costs as variable, fixed, or mixed. (b) Calculate the expected costs when production is 5,000 units. Indicate your choice by placing an “X” in the appropriate column. (The first item is completed as an example). Cost Item Fixed Variable Mixed Direct materials X Direct labor Utilities Property taxes Indirect labor Supervisory salaries Maintenance Depreciation Fixed Costs - Variable Costs (to make 3,000 units) - Variable Cost per Unit Variable Cost Portion of Mixed Cost = 1 Utilities Variable Cost to make 3,000 units = Variable Cost per Unit Maintenance Variable Cost to Make 3,000 Units Variable Cost per Unit Cost to Make 5,000 Units el

Answer 1

Fixed costs are those costs which would remain the same in total irrespective of level of production or sales. It is a committed cost to be incurred by the firm whether it carries out operations or not. Variable costs are those costs which would remain the same per unit irrespective of level of production or sales. It is an unit cost to be incurred by the firm only when the firm carries out its business operation. So, variable costs are the relevant costs for any decision making. Mixed costs are also called as semi variable costs which would remain the same in total upto a volume of production or sale and then start varying along with volume of production or sale. In other words, these costs are partially fixed and partially variable in nature. Fixed Variable Mixed х X [Given) Cost Item Direct materials Direct labor Utilities Property taxes Indirect labor Supervisory salaries Maintenance Depreciation X [Given)

b) Workings: Fixed costs Variable costs (to make 3,000 units) Variable cost per unit Variable cost portion of mixed cost $5,800 (Ref: Workings] $32,700 [Ref: Workings] $10.90 [$32700 / 3000 units] $2,700 [($2100+$1100)-($300+$200)] Fixed costs: Utilities: Variable costs (to make 3,000 units) Variable cost per unit $1,800 [$2100 - $300] $0.60 ($1800 / 3000 units] Utilities Property taxes Supervisory salaries Maintenance Depreciation Total fixed costs $300 $1,000 $1,900 $200 $2,400 $5,800 Direct materials Direct labor Utilities Property taxes Indirect labor Supervisory salaries Maintenance Depreciation Total costs Less: Fixed costs Variable costs $7,500 $18,000 $2,100 $1,000 $4,500 $1,900 $1,100 $2,400 $38,500 $5,800 [As calculated] $32,700 Maintenance: Variable costs (to make 3,000 units) Variable cost per unit $900 ($1100 - $200] $0.30 ($900 / 3000 units] Cost to make 5,000 units $60,300 ($5800 + (5,000 units x $10.90)] (Fixed costs remain constant but variable costs varies with production proportionately)