Accounting problem;n Kim’s Kim chi Products, Inc.

Products, Inc.
Kim’s Kimchi Products, Inc. has automated much of its production of specialized kimchi
and
Korean’s appetizers.    Machines are utilized in many areas of production and most of the labor
time is spent in monitoring and testing for quality.    Labor cost is to a large extent on a salary
basis and is now included as indirect labor cost.
There is
still some direct labor cost.    However, the fixed overhead cost (that now includes what
was once classified as direct labor) is a predominant part of total product cost.
The materials cost per unit of kimchi is $8, and the direct labor cost is $1 per machi
ne hour.
Variable overhead costs (per machine hour) have been budgeted as follows.
Per Machine Hour
Supplies and Other Indirect Materials
$0.60
Power
$0.40
Repairs and Maintenance of Equipment
$0.20
Total Unit Cost Per Machine Hour
$1.20
The fixed
factory overhead has been budgeted for the year as follows.
Factory supervision
$      47,500
Indirect labor
156,000
Payroll taxes and fringe benefits
27,800
Supplies and other indirect materials
16,200
Power
33,000
Heat and light
18,500
Repairs and maintenance of equipment
36,700
Repairs and maintenance of plant
8,400
Taxes and insurance
6,800
Telephone
4,300
Miscellaneous factory overhead
1,200
Depreciation
63,600
TOTAL FIXED OVERHEAD
$420,000
The president of the company
, Mr. Paul Jin
, observes, “With such relatively high fixed overhead
cost, it is imperative that we operate at a high volume level to absorb the cost.”
Modified 8.25.14
©
Dr. James Brian Aday
2
The company manufactures 10 units of kimchi
per machine hour, and little can be done to
improve this rate of production.    Attempts will be made to reduce fixed overhead, but the
budget is already tight.
Normal machine hours for the year have been established at 40,000.    The immediate goal is to
op
erate at 60,000 machine hours per year.
Required:
(1)
Compute the product unit cost at a 40,000 machine hour level.    (Show variable
overhead costs and fixed overhead costs separately.)
(2)
Compute the product unit cost at a 60,000 machine hour level.    (Show var
iable
overhead costs and fixed overhead costs separately.)
(3)
How much can unit cost be reduced by increasing production (and sales) by 50 percent,
as represented by the 50 percent increase in machine hours?
(4)
Assuming the selling price of kimchi is $11.00 pe
r unit, compute a profit and loss
statement for both scenarios (40,000 and 60,000 machine hours).

Kim’s KimchiProduncts, Inc. Case Study

Machine Hours   40,000
Material Cost per Unit   $ 8.00
Direct Labor per Hour
Product per Hour (Unit)   10.00
UVC per Hour
VC per Unit
Total Fixed Overhead   $ 420,000
Fixed Cost per Machine Hour
Fixed Cost per Unit

Machine Hours 60,000
Material Cost per Unit
Direct Labor per Hour
Product per Hour (Unit)
UVC per Hour
VC per Unit
Total Fixed Overhead
Fixed Cost per Machine Hour
Fixed Cost per Unit

Answer to Question 1 Question 2
Cost per Unit: 40,000 MH 60,000 MH
Materials
Labor
Variable Overhead
Fixed Overhead
Total Unit Costs

Answer to Question 3:
Unit Cost at 40,000 Machine Hours
Unit Cost at 60,000 Machine Hours
Cost Reduction of

Answer to question 4:
40,000 MH   60,000 MH
Unit Sales   400,000   600,000
Unit Selling Price   $11.00   $11.00
Sales
Direct Materials
Direct Labor
Variable Overhead
Fixed Overhead
Total Costs
Profit
Operating Margin
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