Question

Presented below are four overhead costs of Chemtrails Mfg. Corp. for the first three quarters of 2017. Q1 Q2 Q3 Units Produced 245,700 262,900 251,800 Overhead Costs: Factory Maintenance $ 229,206 $ 239,182 $ 232,744 Indirect Labor 800,982 857,054 820,868 Factory Real Estate Taxes 25,100 25,100 25,100 Indirect Materials 535,626 573,122 548,924 Total Overhead Costs $ 1,590,914 $ 1,694,458 $ 1,627,636 a) Analyze the data to determine the behavior of each cost. Indicate whether each cost is a variable cost, fixed cost, or mixed cost by writing an “X” in the corresponding box in the table below. (1 point per cost = 4 points) Variable Fixed Mixed Factory Maintenance Indirect Labor Factory Real Estate Taxes Indirect Materials. The Analyze the data to determine the cost function for each cost (2 points per cost = 8 points). Finally, Complete the following table for the fourth quarter of 2017. (2 points

Answer 1

Answer: (A) Analyse the data to determine the behaviour of each cost: One the basis of analysis done in part (B) the table below shows the behaviour of each cost in last column.

Chemtrails Mfg. Corporation’s Overhead Costs for 2017
	Q1	Q2	Q3	Q4	Analysis
Production Units	245,700	262,900	251,800	270,000
Overhead Costs:	$	$	$	(C)	(A)
Factory Maintenance	229,206	239,182	232,744	$243,300	Mix Cost
Indirect Labour	800,982	857,054	820,868	$880,200	V. Cost
Factory Real Estate Taxes	25,100	25,100	25,100	$25,100	F. Cost
Indirect Materials	535,626	573,122	548,924	$588,600	V. Cost
Total Overhead Costs	1,590,914	1,694,458	1,627,636	1,737,200

Answer (B) Analyse the data to determine the cost function for each cost: The Analysis is done as follows.

Factory Maintenance: Mixed Cost (Variable cost + Fixed Cost)

                  Variable Cost per unit = Change in factory maintenance Cost ÷ Change in output units

                                                      = ($239,182 – $229,206) ÷ (262,900 – 245,700)

                                                      = $9,976 ÷ 17,200 = 0.58 per unit

                     Total V. Cost for Q1= 245,700 units × 0.58 = $142,506    

Total Fixed Cost for Q1 = Total Mixed Cost – Variable cost

= $229,206 – $142,506 = $86,700

  Indirect Labour: Variable Cost: per unit cost remains constant irrespective of output units.

          Indirect labour per unit for Q1 = ILC ÷ Output = $800,982 ÷ 245,700 units = $3.26

for Q2 = $857,054 ÷ 262,900 = $3.26 per unit

  Factory Real Estate Tax: Fixed Cost (because it is $25,100 for Q1,Q2,and Q3 and will be $25,100 for Q4. It remains unchanged with respect to volume of output or level of activity. Per unit FRE tax increases or decreases with level of activity but in total remains unchanged.

Indirect Material: Variable Cost because total variable cost increase or decreases with increase in output but V.C per unit remains constant.

Indirect Material Cost per unit = $535,626 ÷ 245,700 units = $2.18

The indirect material cost per unit is same for all quarters i.e.$ 2.18.

C) Complete the table for the fourth quarter of 2017. Assumed the production units are 270,000 in quarter four. Therefore,

    Total Factory Maintenance Cost for Q4 = Fixed Cost + V.C per unit × Quantity

                                                                         = $86,700 + 0.58 × 270,000

                                                                         = $86,700 + $156,600 = $243,300

    Indirect Labour Cost for Q4 = V.C per unit × Quantity

                                                       = $3.26 × 270,000 = $880,200

     Factory Real Estate Tax for Q4 = $25,100

     Indirect Material Cost for Q4 = V.C per unit × Quantity

                                                     = $2.18 × 270,000 = $588,600

The above calculated figures are presented in the table under fourth quarter (Q4).

The analysis in part (C) also represents the cost function of each cost in the form of equation.