Question

Lavender manufacturing company began business in the current year. The company uses the simplified method to allocate mixed services costs to production. The company's costs and expenses for the year were as follows:

Direct labor $3,000,000

Direct materials 4,000,000

Factory supervision 800,000

Property tax on factory 100,000

Personnel department 400,000

Computer operations 250,000

General administration 550,000

Marketing 800,000

State income tax 200,000

Total $10,100,000

A. Determine Lavender's total production costs for the year.

B. Assume that the hourly pay for direct labor is much lower than the hourly pay for employees in the general administration and that the employee turnover is much higher for production employees than for the general administration employees. How should these facts affect the company's decision to use the simplified mixed services method to allocate mixed services costs to production?

Answer 1

Solution to A.
Lavender Total Cost of Manufacturing
Particulars	$
Direct Raw Material Cost(A)	4,000,000
Direct Labor Cost(B)	3,000,000
Prime Cost(A+B)	7,000,000
Factory Overheads
Factory Supervision	800,000
Property Tax on factory	100,000
Personnel Department	400,000
Administration Overheads
Computer Operations	250,000
General Operations	550,000
State Income Tax	200,000
Total Cost of Production	9,300,000
Selling And Distribution Overheads
Marketing	800,000
Total Cost	10,100,000
Solution to B.
In direct labors, cost per unit can be easily identified and but the same can not be possible in case of general overheads due to indirect nature of cost and an appropriate method for calculating cost is to be followed. Hence, Mixed service cost method shall be provided by giving the equal emphasis to nature of cost i.e. direct or indirect.