Question

Kubin Company’s relevant range of production is 18,000 to 22,000 units. When it produces and sells 20,000 units, its average costs per unit are as follows:

Required:

1. Assume the cost object is units of production:

a. What is the total direct manufacturing cost incurred to make 20,000 units?

b. What is the total indirect manufacturing cost incurred to make 20,000 units?

2. Assume the cost object is the Manufacturing Department and that its total output is 20,000 units.

a. How much total manufacturing cost is directly traceable to the Manufacturing Department?

b. How much total manufacturing cost is an indirect cost that cannot be easily traced to the Manufacturing Department?

3. Assume the cost object is the company’s various sales representatives. Furthermore, assume that the company spent $50,000 of its total fixed selling expense on advertising and the remainder of the total fixed selling expense comprised the fixed portion of the company’s sales representatives’ compensation.

a. When the company sells 20,000 units, what is the total direct selling expense that can be readily traced to individual sales representatives?

b. When the company sells 20,000 units, what is the total indirect selling expense that cannot be readily traced to individual sales representatives?

4. Are Kubin’s administrative expenses always going to be treated as indirect costs in its internal management reports?

Answer 1

1a. The total direct manufacturing cost incurred is computed as follows:

 Direct materials per unit ............................ $7.00

Direct labor per unit .................................. 4.00

Direct manufacturing cost per unit (a)........ $11.00

Number of units sold (b)............................ 20,000

Total direct manufacturing cost (a) × (b).... $220,000

1b. The total indirect manufacturing cost incurred is computed as follows:

Variable manufacturing overhead per unit... $1.50

Fixed manufacturing overhead per unit....... 5.00

Indirect manufacturing cost per unit (a) ..... $6.50

Number of units sold (b)............................ 20,000

Total indirect manufacturing cost (a) × (b) . $130,000

(Note: The average fixed manufacturing overhead cost per unit of $5.00 is valid for only one level of activity—20,000 units produced.) 

2a. The total manufacturing cost that is directly traceable to the Manufacturing Department is computed as follows:

Direct materials per unit ............................ $7.00

Direct labor per unit .................................. 4.00

Variable manufacturing overhead per unit... 1.50

Fixed manufacturing overhead per unit....... 5.00

Total manufacturing cost per unit (a).......... $17.50

Number of units sold (b)............................ 20,000

Total direct costs (a) × (b)......................... $350,000 

2b. None of the manufacturing costs should be treated as indirect costs when the cost object is the Manufacturing Department. 

3a. The first step in calculating the total direct selling expense is to determine the fixed portion of the sales representatives’ compensation as follows:

Fixed selling expense per unit (a)............... $3.50

Number of units sold (b)............................ 20,000

Total fixed selling expense (a) × (b)........... $70,000

Total fixed selling expense (a).................... $70,000

Advertising expenditures (b)...................... $50,000

Total fixed portion of the sales

representatives’ compensation (a) ‒ (b)... $20,000 

The second step is to calculate the total direct selling expense that is traceable to individual sales representatives as follows: 

Sales commissions per unit (a)................... $1.00

Number of units sold (b)............................ 20,000

Total sales commission (a) × (b)................ $20,000

Fixed portion of sales

representatives’ compensation......................................... 20,000

Total direct selling expense ........................ $40,000

3b. The total indirect selling expense that cannot be traced to individual sales representatives is $50,000. The advertising expenditures cannot be traced to specific sales representatives.

 4. No. Kubin’s administrative expenses could be direct or indirect depending on the cost object. For example, the chief financial officer’s salary would be an indirect cost if the cost object is units of production; however, his salary would be a direct cost if the cost object is the Finance Department that he oversees.

1a. Total direct manufacturing cost ......... $220,000

1b.Total indirect manufacturing cost ......... $130,000 

2a. Total direct costs......................... $350,000 

2b. None of the manufacturing costs should be treated as indirect costs when the cost object is the Manufacturing Department. 

3a. Total direct selling expense ........................ $40,000

3b. The total indirect selling expense that cannot be traced to individual sales representatives is $50,000. The advertising expenditures cannot be traced to specific sales representatives.

 4. No. Kubin’s administrative expenses could be direct or indirect depending on the cost object. For example, the chief financial officer’s salary would be an indirect cost if the cost object is units of production; however, his salary would be a direct cost if the cost object is the Finance Department that he oversees.