91Ó°ÊÓ

The Fremont, California, plant of New United Motor Manufacturing, Inc. (NUMMI), a joint venture of General Motors and Toyota, assembles two types of cars (Corollas and Geo Prisms). Separate assembly lines are used for each type of car. Classify each cost item (A-H) as follows: a. Direct or indirect (D or I) costs with respect to the total number of cars of each type assembled (Corolla or Geo Prism b. Variable or fixed (V or F) costs with respect to how the total costs of the plant change as the total number of cars of each type assembled changes. (lf in doubt, select on the basis of whether the total costs will change substantially if there is a large change in the total number of cars of each type assembled. A. cost of tires used on Geo Prisms B. Salary of public relations manager for NUMMI plant C. Annual awards dinner for Corolla suppliers D. Salary of engineer who monitors design changes on Geo Prism E. Freight costs of Corolla engines shipped from Toyota City, Japan, to Fremont, California F. Electricity costs for NUMMI plant (single bill covers entire plant) G. Wages paid to temporary assembly-line workers hired in periods of high production (paid on hourly basis) H. Annual fire-insurance policy cost for NUMMI plant

Step by step solution

01

Analyze Cost A

Cost A refers to the cost of tires used on Geo Prisms. These are direct costs because they can be directly traced to each Geo Prism. They are variable costs because the total cost of tires will change with the number of Geo Prisms manufactured.

02

Analyze Cost B

Cost B is the salary of the public relations manager for the NUMMI plant. This is an indirect cost because it cannot be traced directly to either type of car. It's a fixed cost, as the salary does not change based on the number of cars assembled.

03

Analyze Cost C

Cost C refers to the annual awards dinner for Corolla suppliers. This is an indirect cost related to Corolla production but not directly tied to each Corolla. It's a fixed cost because the dinner cost typically doesn’t change with the number of Corollas produced.

04

Analyze Cost D

Cost D is the salary of an engineer who monitors design changes on Geo Prism. This is a direct cost because it directly pertains to Geo Prisms. It is a fixed cost, as the salary remains the same regardless of the number of Geo Prisms produced.

05

Analyze Cost E

Cost E involves freight costs of Corolla engines. This is a direct cost for Corollas as it relates directly to the shipping process for Corolla engines. These costs are variable, depending on the volume shipped.

06

Analyze Cost F

Cost F refers to electricity costs for the entire NUMMI plant. This is an indirect cost for both types of cars as it can't be directly attributed to either. It is considered a fixed cost since the bill is typically flat or does not vary significantly with the number of cars assembled.

07

Analyze Cost G

Cost G relates to wages paid to temporary workers. This is a direct cost because it's related to assembly operations. It is a variable cost as these wages will increase or decrease with production levels.

08

Analyze Cost H

Cost H is the annual fire-insurance policy cost for the plant. This is an indirect cost for the production of both cars. It is a fixed cost as it remains constant regardless of the number of cars produced.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Direct Costs

In a manufacturing setting, direct costs are those expenses that can be directly traced back to a specific product. For example, the cost of materials like tires on Geo Prisms or the freight cost of Corolla engines, as mentioned in the original exercise, are direct costs.
These costs are directly attributable to the process of making that specific product. Direct costs typically include raw materials and labor that directly contribute to the production of goods.
It's important to note that while direct costs are linked to specific items, they can still be variable or fixed in nature, depending on whether they change with production levels.

Indirect Costs

Indirect costs, on the other hand, are not directly traceable to a single product. In the context of our exercise, the salary of the public relations manager and the cost of electricity for the NUMMI plant are examples of indirect costs.
These costs support the overall production process but cannot be pinned down to a specific unit of product. Indirect costs include utilities, administrative expenses, and salaries of staff who work across multiple products.
These costs are vital for keeping the production line moving but do not fluctuate for each unit made .

Variable Costs

Variable costs are those that vary with the level of output. For instance, the cost of tires for Geo Prisms and wages for temporary assembly-line workers in high production periods are variable costs. These expenses increase as more products are made and decrease when production slows down.
Variable costs are important to understand because they directly affect a company's profit. The more products a company makes, the higher the variable costs will be.
This type of cost is vital for companies to track, especially in manufacturing, as it can greatly affect the margins.

Fixed Costs

Fixed costs remain constant regardless of how many units are produced. Some examples from our exercise include the salary of the engineer monitoring design changes and the annual fire-insurance policy. These costs do not change with the level of production.
Fixed costs are an essential part of budgeting and planning because they represent expenses that will be incurred regardless of how much is produced.
An understanding of fixed costs helps companies set pricing strategies and measure performance over time, since these are predictable and often easier to manage compared to variable costs.