Direct material. $2,100,000 (LO 2-2, 2-5, 2-10 Advertising expense. 99,000 1(a). Total prime costs:$2,680,000 1(d). Manufacturing overhead:$534,000 Depreciation on factory building 115,000 Direct labor: wages. 485,000 Cost of finished goods inventory at year-end. 115,000 Indirect labor: wages 140,000 Production supervisor's salary. 45,000 Service department costs*. 100,000 Direct labor: fringe benefits 95,000 Indirect labor: fringe benefits 30,000 Fringe benefits for production supervisor. 9,000 Total overtime premiums paid 55,000 Cost of idle time: production employees 40,000 Administrative costs 150,000 Rental of office space for sales personnel". 15,000 Sales commissions 5,000 Product promotion costs. 10,000 "All services are provided to manufacturing departments. SCost of idle time is an overhead item; it is not included in the direct-labor wages given above. *The rental of sales space was made necessary when the sales offices were converted to storage space for raw material.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
The following cost data for the year just ended pertain to Sentiments, Inc., a greeting card manufacturer:
1(a). Total prime costs:$2,680,000 1(d). Manufacturing
Required:
1. Compute each of the following costs for the year just ended: (a) total prime costs, (b) total
2. One of the costs listed above is an opportunity cost. Identify this cost, and explain why it is an opportunity cost.
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