Question

Maximum Plastics makes granular plastics for sale to the public and the government. Basic cost data for a 100-pound drum of one product called Ultra-Pellet appears below:

                                            Qty                     Cost

Chemical A, gals                      15                  $25.00           

Chemical B, gals                      35                  $27.50           

Base material, pound              20                    $1.00           

100-lb lined drum                    1                   $51.83           

Variable factory overhead is estimated to be $1,200,000 per month, when 1,000,000 pounds of various products are produced. The plant employs 20 chemical workers who typically work 175 hours each per month and are paid $24 per hour. Other workers are classified as indirect and are included in fixed overhead. The highly automated plant typically runs 21,000 machine hours per month. The preparation of one 100-pound batch of Ultra-Pellet needs ten minutes of direct labor and 75 minutes of machine time. Fixed manufacturing overhead totals $3,500,000 per month. Forty percent of the fixed manufacturing overhead is labor-related costs and the balance is machine-related costs.

Assuming normal production levels, what is the amount of variable and fixed overhead per drum?

Answer 1

Answer to Question:

Variable overhead per pound:

= variable overheads ÷ pounds of products to be produced

= 1,200,000 ÷ 1,000,000

= $1.2 per pound

Variable Overhead Cost of Producing 100 pound drum = 100 *  $1.2 per pound = $120

Fixed Cost per 100 pound drum = Labor Related Cost + Machine related Cost (Working Note)

= $4+$125

= $129

Working Note:

Particulars	Bases	No.of hours	Cost per hour	Total time reqd per 100 pound drum	Total Cost-100 pound drum
Total Fixed Manufacturing Overhead	3500000
Labor Related Costs	1400000		24(given)	0.166666667	$4
	[35,00,000*40%]
Machine Related Costs	2100000	21000	100	1.25	$125
	[35,00,000*60%]