What kinds of costs, such as packaging, might be easy to forget when calculating production costs...
What kinds of costs, such as packaging, might be easy to forget when calculating production costs and contribution margin? Provide any examples that you may have witnessed in the past. What might be missed and incorrectly included when determining variable and/or fixed cost to calculate contribution margin?
Homework Answers
Production cost includes all sorts of manufacturing costs. These are direct costs and indirect costs.
Contribution margin is the excess of sales over variable costs.
Some sorts of very small item costs may be easily forgotten.
These are as below:
No.1) Indirect material cost: examples are disposable tools, glue, tape, cleaning supplies, etc. These are required in production in very small quantity; therefore, costs become negligible and may be forgotten.
No.2) Indirect labor cost: examples are contractual labor for small duration, cleaning staff, material handling staff. Since they are not direct labor, costs to them may also be forgotten.
Costs like supervisor salary (if paid on unit basis then it becomes variable or otherwise it is fixed), and electricity charges (basically it is fixed in nature) could be missed and could be recorded incorrectly – suppose electricity charges may be recorded as variable costs and by this effect contribution margin may become low.
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