Question

Kubin Company's relevant range of production is 13,000 to 18,000 units. When it produces and sells 15,500 units, its average costs per unit are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Fixed selling expense Fixed administrative expense Sales commissions Variable administrative expense Average Cost per Unit $ 7.40 $ 4.40 $ 1.90 $ 5.40 $ 3.90 $ 2.90 $ 1.40 $ 0.90 Required: 1. For financial accounting purposes, what is the total amount of product costs incurred to make 15,500 units? 2. For financial accounting purposes, what is the total amount of period costs incurred to sell 15,500 units? 3. For financial accounting purposes, what is the total amount of product costs incurred to make 18,000 units? 4. For financial accounting purposes, what is the total amount of period costs incurred to sell 13,000 units? (For all requirements, do not round intermediate calculations.) 1. Total amount of product costs 2. Total amount of period costs incurred 3. Total amount of product costs 4. Total amount of period costs

Answer 1

1) 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. Direct material cost per unit Direct labor cost per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per unit Product cost per unit Number of units produced Total amount of product costs $7.40 $4.40 $1.90 $5.40 $19.10 15,500 $296,050 [15500 x $19.10] 2) 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 selling expense per unit Fixed administrative expense per unit Sale commissions per unit Variable administrative expense per unit Period cost per unit Number of units sold Total amount of period costs $3.90 $2.90 $1.40 $0.90 $9.10 15,500 $141,050 [15500 x $9.10] 3) 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 manufacturing overhead per unit Total variable product costs per unit Number of units produced Total amount of variable product costs Add: Fixed manufacturing overhead costs Total amount of product costs $7.40 $4.40 $1.90 $13.70 18,000 $246,600 [18000 x $13.70] $83,700 [15500 x $5.40 --> Remains constant] $330,300 4) [Variable costs] [Variable costs] Sale commissions per unit Variable administrative expense per unit Total variable period costs per unit Number of units sold Total amount of variable period costs Add:Fixed selling expense Add:Fixed administrative expense Total amount of product costs $1.40 $0.90 $2.30 13,000 $29,900 $60,450 $44,950 $135,300 [13000 x $2.30] [15500 x $3.90 --> Remains constant] (15500 x $2.90 --> Remains constant]