Bendix Ltd is a car parts manufacturer. It supplies you the following information regarding costs at...
Bendix Ltd is a car parts manufacturer. It supplies you the following information regarding costs at various levels of monthly production:
|
Production volume |
8 000 units |
12 000 units |
|
Direct materials |
$80 000 |
$120 000 |
|
Direct labour |
64 000 |
96 000 |
|
Indirect materials |
24 000 |
36 000 |
|
Supervisors’ salaries |
12 000 |
12 000 |
|
Depreciation on plant |
10 000 |
10 000 |
|
Maintenance |
32 000 |
44 000 |
|
Utilities |
15 000 |
21 000 |
|
Insurance on plant and equipment |
1 600 |
1 600 |
|
Property taxes on plant |
2 000 |
2 000 |
|
Total |
$241 600 |
$342 600 |
In the above table there are some pure variable costs, some pure fixed costs and some mixed costs.
Required:
- Identify and make separate lists of the pure variable costs, pure fixed costs and mixed costs and calculate their totals.
- Split the total mixed costs into Fixed and Variable elements using High/Low method, calculate total fixed cost and develop the equation for total monthly production costs?
- Explain to the management how to use the cost equation you developed in (2) above to predict total costs for the monthly production volume of 9 000 units and also calculate the correct unit cost.
- In 2019 the company has produced 9 000 units. According to the Accountant’s calculations the unit cost was $28.05 ($336 600 / 12 000). The company added 10% margin to the cost and had set a selling price of $30.85.
However, the financial results show that there was a gross loss in the year. The company management cannot understand this mystery.
Explain to the management why there was a loss.
Could you present exactly 4 answers according to the 4 questions above?
Homework Answers
| Part 1 | ||||||
| Production Costs | Behaviour | Pure Variable Costs per unit | Pure Fixed Costs | Mixed Costs(At 8000 units) | ||
| Direct Materials | Variable Cost | $ 10.00 | ||||
| Direct labor | Variable Cost | $ 8.00 | ||||
| Indirect Materials | Variable Cost | $ 3.00 | ||||
| Supervisor's Salary | Fixed Cost | $ 12,000.00 | ||||
| Depreciation on Plant | Fixed Cost | $ 10,000.00 | ||||
| Maintainance | Mixed Cost | $ 32,000.00 | ||||
| Utilities | Mixed Cost | $ 15,000.00 | ||||
| Insurance on plant and equipment | Fixed Cost | $ 1,600.00 | ||||
| Property taxes on plant | Fixed Cost | $ 2,000.00 | ||||
| Total | $ 21.00 | $ 25,600.00 | $ 47,000.00 | |||
| Please Note that the Total of PURE Variable Cost is in Per unit basis, If you wan the total then just multiply the no. of units produced, The reason I did this in per unit is that if I had | ||||||
| showed the Total then it will be different for different level of output plus the Actual output is not mentioned here. | ||||||
| Similarly for the above same reason I showed the Total Mixed Cost at 8000 units. Alternatively the Total can also be showed for 10000 units | ||||||
| Part 2 | ||||||
| Total Maintainance cost | ||||||
| Units | Maintainance cost | |||||
| High level of activity | 12,000 | $44,000 | ||||
| Low level of activity | 8,000 | $32,000 | ||||
| Change | 4,000 | $12,000 | ||||
| Variable operating cost per km =$12,000 / 4,000 =$3 per unit | ||||||
| Fixed cost element =$44,000 - (12,000*$3) | ||||||
| Fixed cost element =$8,000 | ||||||
| Total Utilities cost | ||||||
| Units | Utilities cost | |||||
| High level of activity | 12,000 | $21,000 | ||||
| Low level of activity | 8,000 | $15,000 | ||||
| Change | 4,000 | $6,000 | ||||
| Variable operating cost per km =$6,000 / 4,000 =$1.50 per unit | ||||||
| Fixed cost element =$21,000 - (12,000*$1.50) | ||||||
| Fixed cost element =$3,000 | ||||||
| Part 3 | Now since the Variable Cost and Fixed Cost of the Mixed Cost are being separated now the final unit cost and total cost can be shown in this way: | |||||
| Production Costs | Behaviour | Variable Costs per unit | Fixed Costs | |||
| Direct Materials | Variable Cost | $ 10.00 | ||||
| Direct labor | Variable Cost | $ 8.00 | ||||
| Indirect Materials | Variable Cost | $ 3.00 | ||||
| Supervisor's Salary | Fixed Cost | $ 12,000.00 | ||||
| Depreciation on Plant | Fixed Cost | $ 10,000.00 | ||||
| Maintainance | Mixed Cost | $ 3.00 | $ 8,000.00 | |||
| Utilities | Mixed Cost | $ 1.50 | $ 3,000.00 | |||
| Insurance on plant and equipment | Fixed Cost | $ 1,600.00 | ||||
| Property taxes on plant | Fixed Cost | $ 2,000.00 | ||||
| Total | $ 25.50 | $ 36,600.00 | ||||
| So now the equation will be :Y =$36,600+$25.50X | ||||||
| Total Cost at 9000 units =$36,600 + ($25.50*9000) =$266,100 | ||||||
| Part 4 | As shown in Part 3 the correct Total Cost at 9000 units is $266,100 but as per accountant the Total Cost is $336,600. | |||||
| As a result the accounant has overstated the cost by $70,500 which is higher by 26.50% and that is the reason there is such a loss this year | ||||||
| Also the accounant has not bifurcated the Fixed Cost and Variable cost. | ||||||
|
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