Question

ble. Production E20-1 Bonita Company manufactures a single product. Annual production costs incurred in the manufacturing process are shown below for two levels of production: Costs Incurred 5,000 Units Direct materials 10,000 Units Direct labour $ 8,000 $16,000 9,500 Utilities 19,000 2,000 Rent 3,300 4,000 4,000 Maintenance 800 1,400 Supervisory salaries 1,000 1,000 Total cost $25,300 $44,700 Instructions (a) Define these terms: variable costs, fixed costs, and mixed costs. (b) Classify each production cost listed as variable, fixed, or mixed. (c) Calculate the expected production costs if 9,000 units are produced. Sons,

Answer 1

(a)

Variable cost is the expense that changes with the volume of product. Variable cost varies directly with the activity level but variable cost per unit is constant.

Fixed cost is the expenses which remains constant with change in production level with in a relevant activity range.

Mixed cost is the expense which consist both fixed component and variable cost component. This cost changes with different activity levels.

(b)

Direct material	Variable cost
Direct labor	Variable cost
Utilities	Mixed cost
Rent	Fixed cost
Maintenance	Mixed cost
Supervisory salaries	Fixed cost

(c)

Direct material cost per unit = Total material cost /Number of units = $ 16,000/10,000 = $ 1.6

Direct material cost per unit = Total labor cost /Number of units = $ 19,000/10,000 = $ 1.9

We need to separate fixed and variable component of utilities and maintenance cost using high low method.

Variable cost per unit

= (Highest activity cost – Lowest activity cost)/ (Highest activity units – Lowest activity Units)

Fixed cost = Highest activity cost - (Variable cost per unit x Highest activity units)

Utilities:

Variable cost per unit = ($ 3,300 - $ 2,000)/ (10,000 – 5,000)

                                  = $ 1,300/5,000

                                  = $ 0.26

Fixed cost = $ 3,300 – ($ 0.26 x 10,000)

                 = $ 3,300 – $ 2,600 = $ 700

Maintenance:

Variable cost per unit = ($ 1,400 - $ 800)/ (10,000 – 5,000)

                                   = $ 600/5,000

                                   = $ 0.12

Fixed cost = $ 1,400 – ($ 0.12 x 10,000)

                 = $ 1,400 – $ 1,200 = $ 200

Computation of expected cost for 9,000 units:

	For 9,00 Units
Direct material ($ 1.6 x 9,000)	$        14,400.00
Direct labor ($ 1.9 x 9,000)	$        17,100.00
Utilities [$ 700 + ($ 0.26 x 9,000)]	$           3,040.00
Rent	$           4,000.00
Maintenance [$ 200 + ($ 0.12 x 9,000)]	$           1,280.00
Supervisory salaries	$           1,000.00
Total cost	$        40,820.00