CASE 1:

Pacific Company produces and sells car brake shoes. It supplies you the following information regarding costs at various levels of monthly production:

Production Volume

7000 Units

10 000 Units

Accountant's Classification

Direct materials

$70 000

$100 000

Variable

Direct Labour

56 000

80 000

Variable

Indirect Materials

21 000

30 000

Variable

Supervisor's Salaries

12 000

12 000

Fixed

Depreciation on plant

10 000

10 000

Fixed

Maintenance

32 000

44 000

Variable

Utilities

15 000

21 000

Variable

Insurance on Plant and equipment

1 600

1 600

Fixed

Property taxes on plant

2 000

2 000

Fixed

Total

$219 600

$300 600

Required:-

1.The accountant of the company has limited knowledge about various types of costs and cost behavior. He has classified the costs into fixed and Variable as appears in the right hand column in the above table. Do you agree with the Accountant's Cost classification? Why, or why not? Can you identify each cost as being variable, fixed, or mixed by writing the name of each cost under one the following headings:

Variable CostsFixed Costs Mixed Costs

2.One of the junior trainee accountant who is a recent Uni. Graduate has mentioned that not all costs can be strictly classified into fixed and variable. There may be some costs that are not strictly variable or fixed. They are called mixed costs.

Do you agree with this trainee? If so, how do you split the mixed costs into Fixed and Variable elements and develop an equation for total monthly production costs?

3.Explain to the management how to develop and use the cost equation you developed in (2) above to predict total costs for the monthly production volume of any number of units and also calculate the correct unit cost.

4.In 2019 the company has produced 8 000 units. According to the Accountant's calculations the unit cost was $27. 71. The company added 10% margin to the cost and was selling its products for $30.50. However, the financial results show that there was a gross loss in the year. The company management cannot understand this mystery. Explain to the management why there was a loss.