Question

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Kubin Company's relevant range of production is 25,000 to 33,500 units When it produces and sells 29.250 units, its average costs per unit are as follows: Amount per Unit $ 8.50 $5.50 $ 3.60 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Fixed selling expense Fixed administrative expense Sales commissions Variable administrative expense 5.00 $4.00 $ 2.50 $2.00 Required: 1. What is the incremental manufacturing cost incurred if the company increases production from 29.250 to 29.251 units 2. What is the incremental cost incurred if the company increases production and sales from 29.250 to 29,251 units? 3. Assume that Kubin Company produced 29,250 units and expects to sell 28.900 of them. If a new customer unexpectedly emerges and expresses interest in buying the 350 extra units that have been produced by the company and that would otherwise remain unsold, what is the incremental manufacturing cost per unit incurred to sell these units to the customer? 4. Assume that Kubin Company produced 29.250 units and expects to sell 28,900 of them. If a new customer unexpectedly emerges and expresses interest in buying the 350 extra units that have been produced by the company and that would otherwise remain unsold, what incremental selling and administrative cost per unit is incurred to sell these units to the customer?

Answer 1

1&2) Product costs are those costs which are incurred at the factory level during production process which may be direct or indirect costs. Of which, variable product costs will change when production volume increases or decreases whereas fixed product costs do not change, unless there are some conditions that have the capability to decrease or cause to increase the same. Product cost is nothing but the manufacturing cost which include direct materials, direct labor, variable & fixed mfg. overheads. Period costs are those costs which are incurred outside the factory but for carrying out firm's selling and administrative related operating activities and financing activities. Of which, variable period costs will change when sales volume increases or decreases whereas fixed period costs do not change, unless there is any particular condition that has the capability to decrease and cause to increase the same. 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.

Though not accepted by GAAP for reporting purpose, analyzing cost behavior by segregating total costs into variable, fixed and mixed is important for better cost control in manufacturing as well as sales process. Still, fixed costs will execute its normal behavior upto a particular volume of activity only. After that, it may change its behavior due to various reasons. Therefore, to decide whether a cost if relevant or not, volume upto which the costs execute their normal behavior shall be considered carefully. It is technically called as relevant range as it is the range within which a particular cost behavior will hold. Direct material cost per unit Direct labor cost per unit Variable mfg. overhead per unit 1) Incremental manufacturing cost Variable selling expense per unit Variable administrative expense per unit 2) Incremental total cost $8.50 $5.50 $3.00 $17.00 $2.50 $2.00 $21.50 [if production increases by 1 unit within relevant range] [Sale commission] [if production & sales increases by 1 unit within relevant range] 3) When units were produced already and kept ready for sale, all manufacturing costs would have been incurred already. There won't be any incremental manufacturing cost per unit within the relevant range when these goods are sold in later date. Therefore, Incremental manufacturing cost $0.00 [if produced units are sold later within relevant range]

4) When units were produced already and kept ready for sale, all manufacturing costs would have been incurred already. Even, variable administrative expenses would have been incurred also. However, variable selling expense will incur only when units are sold in later date. Therefore, Incremental sell. & admin. cost per unit $2.50 [Sale commission)