EXERCISE 1-7 Direct and Indirect Costs LO1-1 Kubin Company\'s relevant range of

Question

EXERCISE 1-7 Direct and Indirect Costs LO1-1 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: Average Cost per Unit Direct materials . . . . $7.00 $4.00 $1.50 $5.00 $3.50 $2.50 $1.00 $0.50 Variable manufacturing overhead . Fixed administrative expense . . Sales commissions . Required: 1. Assume the cost object is units of production: What is the total direct manufacturing cost incurred to make 20,000 units? 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. b. 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? 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. 3. When the company sells 20,000 units, what is the total direct selling expense that can be readily traced to individual sales representatives? When the company sells 20,000 units, what is the total indirect selling expense that can- not be readily traced to individual sales representatives? a. b. Are Kubin's administrative expenses always going to be treated as indirect costs in its internal management reports? 4.

Explanation / Answer

1a. The total direct manufacturing cost incurred 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) $220,000.00 1b. The total indirect manufacturing cost incurred 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) $130,000.00 2a. The total manufacturing cost that is directly traceable to the Manufacturing Department 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 Indirect manufacturing cost per unit (a) $17.50 Number of units sold (b) 20,000 Total direct costs (a) × (b) $350,000.00 2b.None of the manufacturing costs should be treated as indirect costs when the cost object is the Manufacturing Department. 3a) Fixed selling expense per unit (a) $3.50 Number of units sold (b) 20000 Total fixed selling expense (a) × (b) $70,000.00 Total fixed selling expense (a) $70,000.00 Advertising expenditures (b) ($2.50 x 20000) $50,000.00 Total fixed portion of the sales representatives’ compensation (a) (b) $20,000.00 total direct selling expense that is traceable to individual salet Sales commissions per unit (a) $1.00 Number of units sold (b) 20000 Total sales commission (a) × (b) $20,000.00 Fixed portion of sales representatives’ compensation $20,000.00 Total direct selling expense $40,000.00 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.

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