Direct and indirect costs, effect of changing the classification of a cost item

(continuation of 2-18). Finnish Forest Products (FFP) employs a consultant to help reduce energy costs at its Vaasa plant. Currently, FFP does not trace energy costs to each product line. The energy consultant notes that each production line at the Vaasa plant has multiple energy meters and that tracing of energy costs to each line is possible. Ofthe $180 million of indirect manufacturing costs in July 2007, $108 million is for energy costs traceable to indi¬

vidual production lines and $24 million is fixed cost. Using this information, FFP’s cost ana¬

lyst reports the following revised numbers forJuly 2007 (in millions):

Supreme Deluxe Regular Direct materials cost $100.80 $ 64.80

$ 74.40 Direct manufacturing labour cost 16.80 33.60 9.60 Direct energy costs 47.76 24.84 35.40 Indirect manufacturing costs 20.16 40.32 11.52 56 CHAPTER 2 Kilograms produced 80 120 100 Required 1. What is the difference between a direct cost and an indirect cost?
2. Why might FFP’s managers prefer energy costs to be traced as a direct cost rather than included as part ofindirect manufacturing costs?
3. Compute the revised unit manufacturing cost per kilogram for each product produced in July 2007. Compare these costs with those computed in requirement 1 of Exercise 2-18. Comment on any differences in the unit cost numbers.