Question

Completely and thoroughly explain how Total Product Costs would be calculated to determine the total cost to make an electric coffee maker for a company that makes a variety of small home appliances. Include as much detail as possible and do not simply discuss the broad major cost categories of direct materials, direct labor, and manufacturing overhead.

Answer 1

The total cost will be equal to the sum of these two costs, namely fixed and variable cost.

Fixed Cost will Include-

Salary of owner/manager- salary of all employees.

All other salaries and wages-salary of labourers.

Rent/lease- rent of the property.

Advertising- It will be done to introduce this new product on the market.

Delivery expenses- The product delivery will also be costly.

Insurance- Insurance of machinery parts and a warranty or guarantee will be provided on the product to increase customers.

Consumables- Small parts of coffee maker like wires etc.

Interest- It will be paid if there is any loan.

Maintenance- It will be done to machines as well as product.

Legal and professional costs- It is borne by every company to settle issues.

Contingency costs- It depends on the past.

Fixtures and equipment, Installation charges- These charges are borne by the company in the starting.

Registrations, licences and permits- they are done at the starting only.

Market research cost.- It is done prior to starting production so that best method to produce can be implemented and according to the need of the customer.

Variable Cost will Include-

Supplies-stock-in-trade.

Raw material cost- raw material required for production.

Starting inventory- It is bought to fulfill the demand in the starting.

Telephone, Other utilities (e.g. electricity, gas)- It will be paid according to usage.

Packaging cost- Produced products are packed to be sold in the market.

For this company, there will be many fixed casts as mentioned above, these costs will affect the cost of the electric coffee maker.

Since the company already makes small home appliances, therefore, it will have skilled labour and machines that will reduce the cost.

All these factors will lead to the final cost of the coffee maker.

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