Question

Perez Manufacturing Company makes tents that it sells directly to camping enthusiasts through a mail-order marketing program. The company pays a quality control expert $114,000 per year to inspect completed tents before they are shipped to customers. Assume that the company completed 1,680 tents in January and 1,140 tents in February. For the entire year, the company expects to produce 20,000 tents.

Required

3. If the cost objective is to determine the cost per tent, is the expert’s salary a direct or an indirect cost?

4. How much of the expert’s salary should be allocated to tents produced in January and February?

Answer 1

Part A

If the Company objective is to determine the cost per tent then the Expert Salary is an indirect costs because it has nothing to do with the number of tents produced. It is a fixed cost which company have to pay for services of expert it will not be affected by fluctuations in production so it is in the category of indirect costs. The cost is of fixed nature which will be allocated upon product by using number of units as the cost driver and allocatd cost is a part of indirect costs.

Part B

Expert Salary Per Tent = Total Expert Salary / Total Expected Production of Tents

Total Expected Production of Tents = 20,000 Tents

Total Expert Salary = $ 114,000

Expert Salary Per Tent = 114,000 / 20,000

Expert Salary Per Tent = $ 5.7

Calculation of Expert Salary Allocation

	A	B	C=A*B
Particular	Tents Produced	Expert Salary Per Tent	Total Salary Allocated
January	1,680	5.7	9,576
February	1,140	5.7	6,498

For January Allocation of Expert Salary = $ 9,576

For February Allocation of Expert Salary = $ 6,498