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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Creating and Using a Cost Formula

Kleenaire Motors manufactures hybrid sports utility vehicles (SUVs). Kleenaire incurs monthly depreciation costs of $10,000,000 on its highly automated plant machinery and warehousing facility. Also, each SUV requires materials and manufacturing overhead resources. On average, the company uses 75,000,000 pounds of steel to manufacture 50,000 SUVs per month. Each pound of steel costs $0.20. In addition, manufacturing overhead resources are driven by machine hours. On average, the company incurs $200,000,000 of variable manufacturing overhead resources to produce 50,000 SUVs per month.

Required:

  1. 1. Create a formula for the monthly cost of SUVs for Kleenaire.
  2. 2. If Kleenaire expects to manufacture 55,000 SUVs next month, what is the expected fixed cost (assuming that 55,000 units is within the company’s current relevant range)? Total variable cost? Total manufacturing cost (i.e., both fixed and variable)?

1.

To determine

Prepare the cost formula for the monthly costs of SUV’s of Company KL.

Explanation

Cost:

Cost can be defined as the cash and cash equivalent which is incurred against the products or its related services which will benefit the organization in the future. There are two types of costs that are fixed and variable costs.

The cost formula for the monthly cost of SUV’s of Company KL is,

Total Cost=Fixed Cost+(Variable Rate×Number Of SUV's)

Substitute $10,000,000 for fixed cost and $4,300 for variable rate in the above formula.

Total Cost=$10,000,000+($4,300×Number Of SUV's)

Working Note:

1. Calculation of variable rate:

First, cost of material per drive and cost of manufacturing overhead is computed so as to calculate the amount of variable rate:

Cost Of Steel Per SUV=Quantity Of SteelSUV's Per Month×Rate Of Steel=75,000,000 ounces50,000 SUV's per month×0

2.

To determine

Compute the value of expected fixed cost, total variable cost and total manufacturing cost.

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