Answer the following questions using the information below:
Flify Manufacturing Inc., incurred total indirect manufacturing labor costs of $500,000. The company is labor intensive. Total labor hours during the period were 5,000. Using qualitative analysis, the manager and the management accountant determine that over the period the indirect manufacturing labor costs are mixed costs with only one cost driver-labor-hours. They separated the total indirect manufacturing labor costs into costs that are fixed ($110,000 based on 8,000 hours of labor) and costs that are variable ($390,000) based on the number of labor-hours used. The company has estimated 7,000 labor hours during the next period.
-Which of the following represents the correct linear cost function?
A) y = $390,000 + $ 48.75X
B) y = $110,000 + $100 X
C) y = $110,000 + $78 X
D) y = $390,000 + $62.50 X

Question

Quizplus · Accepted Answer

According to the information given, the total indirect manufacturing labor costs are mixed costs with only one cost driver-labor-hours. The fixed cost component is $110,000 based on 8,000 hours of labor, which gives a fixed cost per hour of $13.75. The variable cost component is $390,000, which gives a variable cost per hour of $78. Therefore, the correct linear cost function is:

y = $110,000 + $78X
where y is the total indirect manufacturing labor cost and X is the number of labor hours.

To check the accuracy of this linear cost function, we can substitute the estimated labor hours for the next period (7,000) and calculate the expected total indirect manufacturing labor costs:

y = $110,000 + $78(7,000) = $644,000

This matches the estimated total indirect manufacturing labor costs ($500,000 fixed + $273,000 variable = $773,000) divided by the total labor hours (5,000) and multiplied by the estimated labor hours (7,000):

$773,000/5,000 × 7,000 = $644,100.

Therefore, the best choice is C, y = $110,000 + $78X.

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