【正文】 trip and weight) Maple Leaf Company wants to allocate costs to the three products it makes and sells. Cost Allocation Exercise Background bc BOS Copyright169。 Company, Inc. Cost Accounting 20 Cost Accounting How would you characterize the following costs over a time horizon in which the pany plans to increase sales volume by 10%? Fixed Variable Direct Indirect ?CEO’s salary ?Raw materials ?Supervisory labor ?Production floor labor ?Rent ?Equipment depreciation ?Office supplies ?Freight to customer ?Electricity to run machines ?Interest expense to finance inventory ?Advertising ?Goodwill amortization ?Sales missions ?Sales peoples’ salaries ?Sales travel and expenses Costs: Cost Allocation Exercise Question bc BOS Copyright169。 Company, Inc. Cost Accounting 21 Cost Accounting Cost Allocation Exercise Answer Most costs are fixed indirect or variable direct. Fixed Variable Direct Indirect ?Advertising ?Raw materials ?Production floor labor ?Freight to customer ?Interest expense to finance inventory ?Sales missions ?Equipment depreciation ?CEO’s salary ?Supervisory labor ?Rent ?Office supplies ?Goodwill amortization ?Sales people39。 1998 Bain amp。 1998 Bain amp。s salaries Fixed, assuming that current sales force can handle 10% additional volume Indirect, because each salesman sells all three products Sales travel and expenses Fixed, assuming that 10% volume increase will not require significant increase in sales activities Indirect, because salesforce handles all three products Raw material Variable, because a 10% increase in volume would require 10% more raw materials Direct, because raw materials are directly traceable to individual products Cost Allocation Exercise Detailed Answer (2 of 3) bc BOS Copyright169。 Company, Inc. Cost Accounting 24 Cost Accounting Cost Components Fixed vs. Variable Direct vs. Indirect Direct, because even though the products are made on the same machine, the hours spent working on each of the products are directly traceable Production floor labor Variable, because more production labor will be needed to handle the increase in volume Freight to customers Variable, because the freight cost clearly increases with the volume increase Direct, because weight and distance can be directly traced to individual products Interest expense to finance inventory Variable, because more inventory means more inventory financing and hence more interest expense Direct, because inventory is product specific Sales missions Variable, because sales missions are paid based on a percentage of sales Direct, because missions are based on individual product sales Electricity to run machines Variable, because it clearly varies with volume Indirect, because all products are made on the same machines Cost Allocation Exercise Detailed Answer (3 of 3) bc BOS Copyright169。 Company, Inc. Cost Accounting 25 Cost Accounting ?Labor –In many client situations, restraints placed by unions and difficulty in hiring and firing people in response to short term volume fluctuations make a portion of labor costs behave as fixed costs ?Electricity to run machines –In theory this is direct, but in practice it is considered indirect because it is difficult to trace electricity cost to products –Also, the 80/20 rule applies here. Electricity is usually a small cost item, and, for simplicity, could be allocated using machine hours spent on production ?Advertising –Usually, advertising is not tied to volume. For example, advertising to support a corporate brand is not tied to the volume of the products under that brand. If advertising is not tied to volume, it is fixed and indirect. There are few caveats: Cost Allocation Exercise Caveats bc BOS Copyright169。 Company, Inc. Cost Accounting 26 Cost Accounting A dean of a business school is considering starting an executive program. She estimates the revenues and costs as follows: Question: How many students does the program need to break even? Costs: Revenue: Advertising Classroom rental (Each classroom can acmodate 15 students)