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A company has the below info available regarding costs at some levels of monthly production:
A. Classify each cost as fixed, variable, mixed costs. I have done this part with the following answer:
Direct materials – VC
Direct labor – MC
Indirect materials – MC
Supervisors’ salaries – FC
Depreciation on plant – FC
Maintenance – MC
Utilities – MC
Insurance on plant and equipment – FC
Property taxes on plant – FCPlease correct me if I am wrong.
B. Find an equation for total production costs -> I have no idea how to find a variable rate for this question.
A. You are correct except: Direct labour is a variable cost. Otherwise fine 🙂
B. The equation you after is:
Total cost = fixed cost + (quantity x variable cost per unit)
The ones listed as FC are obviously all fixed costs.
The ones labelled VC are variable costs, and to get cost per unit you divide the total in the list by the number of units.
For those labelled MC, since they are part fixed and part variable, you need to use the high/low method (which is covered in my free lecture on cost classification and behaviour).I watched your lecture in terms of cost classification and behavior. And it really helps a lot. It’s easy to understand and by following it, I am able to finish the rest of the question by myself 🙂
Thanks for correcting me about the ‘direct labor’, I just find out ‘Indirect materials’ is also variable cost.
I also have this question but can’t get it correct completely. It’s a computer based question but anytime I submit, I only get 50% of correctness.
For part A, you are only being asked about electricity cost.
How can the fixed cost possibly be $35000 when the cost each month is always a lot less than that!!! 🙂Using high/low on electricity, the variable cost is (20,000 – 15,000) / (1200 – 700) = $10 per hour. (And you should now be able to calculate the fixed cost per month)
Your answer to part B is correct.
Your answer to part C is correct also 🙂
I should have read the question carefully !! In the mean time while waiting for your help, I figured it out myself haha. Anyway, still appreciate your help a lot.
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