uppose Company A plans to produce and sell 5,000 units of a specific product.
According to previous research results, 13 lt of direct material is needed per unit. During the pre-negotiations with the suppliers, the cost of 1 lt of direct material is estimated to be $5.2.
According to previous research results, 5 direct labor hours of direct labor are needed per unit. During the pre-negotiations with the labor unions, the hourly wage of direct labor is estimated to be $65. Management decided to allocate manufacturing overhead expenses through direct labor hours.
Based on planned production volume, variable M/O expense is estimated to be $40,000, and fixed M/O expenses are estimated to be $70,000.
At the end of the period, it was found that 4,500 units had been produced and sold upon decreased demand. 15.6 lt of direct material and 7.8 hours of direct labor were used per item produced. The cost of direct material per lt and hourly wage averaged $6.5 and $52 respectively. Actual M/O expenses are $58,500 TL for variable and $97,500 for fixed components.