Factory maintenance costs $90,000 Direct labor, wages 352,000 Direct labor, health insurance 32,000 Indirect labor, health insurance 15,000 Health insurance for production supervisor 6,500 Administrative costs 55,000 Rental of office space for administrative staff 17,500 Sales commissions 52,500 Direct material 1,230,000 Indirect materials 632,000 Advertising expense 39,000 Depreciation on factory building 62,000 Indirect labor, wages 70,000 Production supervisor's salary 32,000 Use the data to determine the total product cost.
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.
| Factory maintenance costs | $90,000 |
| Direct labor, wages | 352,000 |
| Direct labor, health insurance | 32,000 |
| Indirect labor, health insurance | 15,000 |
| Health insurance for production supervisor | 6,500 |
| Administrative costs | 55,000 |
| Rental of office space for administrative staff | 17,500 |
| Sales commissions | 52,500 |
| Direct material | 1,230,000 |
| Indirect materials | 632,000 |
| Advertising expense | 39,000 |
| 62,000 | |
| Indirect labor, wages | 70,000 |
| Production supervisor's salary | 32,000 |
|
Use the data to determine the total product cost. |
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