Direct and indirect costs, effect of changing the classification of a cost item (continuation of 2-17). Maximum Office Products (MOP) employs a consultant to help reduce energy costs at its Vernon plant. Currently, MOP does not trace energy costs to each product line.

The energy consultant notes that each production line at the Vernon plant has multiple energy meters and that tracing of energy costs to each line is possible. Of the $150 million of indirect manufacturing costs in May 2009, $108 million is for energy costs traceable to individual production lines and $20 million is fixed cost allocated to each product line on the basis of direct manufacturing labour costs of each line. Using this information, MOP’s cost analyst reports the following revised numbers for May 2009 (in millions):

REQUIRED 1. What is the difference between a direct cost and an indirect cost?
2. Why might MOP’s managers prefer energy costs to be traced as a direct cost rather than included as part of indirect manufacturing costs?
3. Compute the revised unit manufacturing cost per kilogram for each product produced in May 2009. Compare these costs with those computed in requirement | of Exercise 2-17.
Comment on any differences in the unit cost numbers.LO1

Transcribed Image Text:

Supreme Deluxe Regular Direct materials cost $84 $54 $ 62 Direct manufacturing labour cost $14 $28 $ 8 Direct energy costs $45 $25 $ 38 Indirect manufacturing costs $20 $15 $ 7 Kilograms produced 80 120 100