Question

I have a problem which includes the sentence:

The supplement for sales and administration is calculated as a percentage supplement on manufacturing cost.

What does this mean? I am trying to calculate the full cost which, if I have understood it correct, means to calculate all the costs including sales- and administrationcost.

I have everything else, but do not seem to understand the sentence:

The supplement for sales and administration is calculated as a percentage supplement on manufacturing cost.

A short description of what the problem is;
A business which produces christmas decorations (the bulbs) produces 1 000 000 og big bulgs, and 2 000 000 of small bulbs.
I have then gotten the information about fixed and variable cost which I had to calculate by using the information that 40% of each fixed and variable cost are used in producing the small bulbs.

The only value I have not calculated is the amount that goes in to producing the small bulbs by taking into account the sales- and administration cost and it is not 40%. The sentence that follows is the sentence I do not understand.

Answer 1

The selling expenses are closely related to the sales of the company. Higher the Sale, the higher will be the the selling expenses. Administrative expenses are less dependent on the sales of the product because many of the items come under the Adminitstrative expenses are fixed costs (e.g. depreciation of office buildings and office equipment and salaries of administrative personnel etc.). So, it is not wrong to say that even if sales increases , Administartive expenses will not increase as such rate or even not increasing at all.

In the given situation, a business which produces christmas decorations (the bulbs) produces 1,000,000 big bulbs, and 2,000,00 of small bulbs. The information provided that 40% of each fixed and variable cost are used in producing the small bulbs.The only value that didnot calculated is the amount that goes in to producing the small bulbs by taking into account the sales- and administration cost and it is not 40%.

Since, the Administrative cost comprises majorly fixed cost expenses which are required to be spend even company not earning a single penny, therefore the same expense is covered under the Fixed Cost bracket and have no major impact over the rest. In case of Selling expenses, it is highly dependent upon the selling of goods, Higher the sale,higher will be the manufacturing of goods and higher the selling expense for selling of goods.Therefore it is better to take rest of the expense under the selling expense since the it is directly linking to sales of the company and for meeting sales higher production needs to be done.