managerial accounting

Question

Fanning Air is a large airline company that pays a customer relations representative $10,000 per month. The representative, who processed 1,070 customer complaints in January and 1,350 complaints in February, is expected to process 24,000 customer complaints during 2018.

Determine the total cost of processing customer complaints in January and in February.

Answer 1

Jennifer,

The Customer Relations Representative receives $ 10,000 per month. Is that a fixed salary or a variable compensation?

1. Fixed Pay

If it is a fixed salary, the cost of processing complaints is $ 10,000 per month, regardless the amount of complaints.

We can suppose that those $ 10,000 is the total labor cost.

a. January:   $10,000.

b. February: $10,000

2. Variable Pay.

If the person is “expected” to process 24,000 complaints per year (i.e. 2,000 per month), the company is “expecting” to pay $ 10,000 for 2,000 complaints ($ 5 per complaint).

If the compensation is variable ($ 5 per complaint), the employee would be paid:

a.  January: 1,070 complaints x 5 $/complaint : $ 5,350.

b.  February: 1,350 complaints x 5 $/complaint: $ 6,750.

3. Cost Systems

Different companies have different cost systems. If the employee receives $ 10,000 per month, the cost system should indicate the difference between the “expected results” ($ 5 per complaint) and actual results. In other words, in January the cost per complaint was $ 9.3 ($10,000/1,070) and in February was $ 7.4 ($10,000/1,350).