# Chapter2 - CHAPTER 2 AN INTRODUCTION TO COST TERMS AND...

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CHAPTER 2 AN INTRODUCTION TO COST TERMS AND PURPOSES 2-16 (15 min.) Computing and interpreting manufacturing unit costs . 1. (in millions) Supreme Deluxe Regular Total Direct material cost \$ 84.00 \$ 54.00 \$ 62.00 \$200.00 Direct manuf. labor costs 14.00 28.00 8.00 50.00 Indirect manuf. costs 42.00 84.00 24.00 150.00 Total manuf. costs \$140.00 \$166.00 \$ 94.00 \$400.00 Fixed costs allocated at a rate of \$20M ÷ \$50M (direct mfg. labor) equal to \$0.40 per dir. manuf. labor dollar (0.40 × \$14; 28; 8) 5.60 11.20 3.20 20.00 Variable costs \$134.40 \$154.80 \$ 90.80 \$380.00 Units produced (millions) 80 120 100 Cost per unit (Total manuf. costs ÷ units produced) \$1.7500 \$1.3833 \$0.9400 Variable manuf. cost per unit (Variable manuf. costs ÷ Units produced) \$1.6800 \$1.2900 \$0.9080 (in millions) Supreme Deluxe Regular Total 2. Based on total manuf. cost per unit (\$1.75 × 120; \$1.3833 × 160; \$0.94 × 180) \$210.00 \$221.33 \$169.20 \$600.53 Correct total manuf. costs based on variable manuf. costs plus fixed costs equal Variable costs (\$1.68 × 120; \$201.60 \$206.40 \$163.44 \$571.44 \$1.29 × 160; \$0.908 × 180) Fixed costs 20.00 Total costs \$591.44 The total manufacturing cost per unit in requirement 1 includes \$20 million of indirect manufacturing costs that are fixed irrespective of changes in the volume of output per month, while the remaining variable indirect manufacturing costs change with the production volume. Given the unit volume changes for August 2008, the use of total manufacturing cost per unit from the past month at a different unit volume level (both in aggregate and at the individual product level) will yield incorrect estimates of total costs of \$600.53 million in August 2008 relative to the correct total manufacturing costs of \$591.44 million calculated using variable manufacturing cost per unit times units produced plus the fixed costs of \$20 million. 2-17 (15 min.) Direct, indirect, fixed and variable costs. 2-1

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1. Clay – Direct, variable Paint- direct, variable Packaging materials –direct (or could be indirect if small and not traced to each unit), variable Depreciation on machinery and molds –indirect, fixed (unless “units of output” depreciation, which then would be variable) Rent on factory – indirect, fixed Insurance on factory –indirect, fixed Factory utilities – indirect, probably some variable and some fixed (e.g. electricity may be variable but heating costs may be fixed) Painters – direct, variable Painting Department manager –indirect, fixed Baking Department manager – indirect, fixed Materials handlers –depends on how they are paid. Most likely indirect fixed if salaried Custodian –indirect, fixed Night guard –indirect, fixed Machinist (running the baking machine) –depends on how they are paid. Most likely indirect fixed, if salaried Machine maintenance personnel – indirect, probably fixed, if salaried, but may be variable if paid only for time worked and maintenance increases with increased production
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## This note was uploaded on 04/20/2011 for the course ACCT 100 taught by Professor Maik during the Spring '10 term at A.T. Still University.

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Chapter2 - CHAPTER 2 AN INTRODUCTION TO COST TERMS AND...

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