Chapter 1

Indirect Manufacturing Cost Formula

(Variable Manufacturing Overhead per Unit × Number of Units​) + (Fixed Manufacturing Overhead per Unit × Actual Number of Units​)​

What is the contribution margin?

Contribution margin is the difference between sales and variable costs.

Define the following terms: (a) cost behavior (b) relevant range

Cost behavior- is the way in which a cost reacts to changes in the level of activity. Relevant range- Range of activity within which assumptions about variable and fixed are valid.

Cost of Goods Formula

Cost of Goods Sold​=(Opening Merchandise + Purchases − Closing Merchandise)

Explain the difference between a product cost and a period cost.

Costs associated with the production or purchase of a product are product costs, and costs not incurred in relation with the manufacturing or purchase of a product are period costs. Direct materials cost, direct labor costs, and manufacturing overhead are part of product costs because these costs are required for manufacturing the product. Selling and administrative expenses are considered period costs because these costs are not required for manufacturing the product. Product costs are recorded in the income statement when sales are made, whereas period costs are recorded in the income statement when the costs are incurred.

Unsold Goods Formula

Finished Goods − Sold Goods

Administrative Expense Formula

Fixed Administrative Expenses per Unit + Variable Administrative Expenses per Unit​) × Number of Units

Total Manufacturing Overhead Formula

Fixed Manufacturing Overhead + (Variable Manufacturing Overhead per Unit × Number of Units​)​

Period Costs per Unit​

Fixed Selling Expense + Fixed Administrative Expense + Sales Commissions + Variable Administrative Expense​

Variable Administration Expenses

(Administration Expense per Unit × Number of Units Sold​)

Direct Manufacturing Cost​ Formula

(Direct Material Cost per Unit + Direct Labor Cost per Unit)​ × Number of Units

Manufacturing Costs Formuala

(Direct Materials per Unit + Direct Labor per Unit + Variable Manufacturing Overhead per Unit​) ​× Number of Units ​+(Fixed Manufacturing Overhead per Unit × Actual Units​)​

Total Administrative Expenses Formula

(Fixed Administrative Expenses + Variable Administrative Expenses​)

Sales Representative Compensation​ Formula

(Fixed Selling Expense − Advertisement Expense​)

Selling Expense Formula

(Fixed Selling Expenses per Unit + Sales Commission per Unit)​ × Number of Units

Incremental Manufacturing Cost Formula

(Manufacturing Cost of 10,001 Units − Manufacturing Cost of 10,000 Units​)

Distinguish between: (a) a variable cost (b) a fixed cost (c) a mixed cost.

(a) a variable cost: Variable costs directly vary with the change in the number of products manufactured, whereas the per unit cost remains the same irrespective of the level of output. (b) a fixed cost: Fixed costs do not change with a change in the number of units produced as far as the activity level is within the limit. Fixed cost per unit will change with changes in the activity level. (c) a mixed cost: When a cost behaves as both fixed and variable cost, it is known as mixed cost.

Define the following: (a) direct materials (b) indirect materials (c) direct labor (d) indirect labor (e) manufacturing overhead

(a) direct materials: Direct materials are the inputs that the final products are made of. The direct materials used for the production of each product are clearly known and therefore are direct product costs. Directly used for the production of the product manufactured by the company are direct materials. (b) indirect materials: Indirect materials are materials used in the production activity of the business, cannot be tracked to each unit of production, and charged as manufacturing overhead costs. Materials whose cost cannot be attributed to a particular product or job are indirect materials. (c) direct labor: Direct labor costs are manufacturing expenses incurred in the form of salaries and wages paid to the workers associated with the production process. Labor costs that are directly assignable to each of the products produced are direct labors. (d) indirect labor: indirect laborers are those laborers who are not involved in the process of converting raw materials into finished goods but are required for the functioning of the manufacturing process, e.g., salaries paid to the manufacturing department managers. Labor costs which are incurred for production, but cannot be traced directly to a particular product are called indirect labor. (e) manufacturing overhead: Indirect labor, indirect material used, depreciation expense, repairs, and maintenance costs are considered manufacturing overheads and known as factory overheads or production overhead costs, whereas selling and administrative costs are not because these costs are not incurred for the manufacturing process.

Variable Cost per unit​ Formula

+ Direct Material +Direct Labor +Variable Manufacturing Overhead +Sales Commissions +Variable Administrative Expenses ​

Wollogong Group Ltd. of New South Wales, Australia, acquired its factory building 10 years ago. For several years, the company has rented out a small annex attached to the rear of the building for $30,000 per year. The renter's lease will expire soon, and rather than renewing the lease, the company has decided to use the annex to manufacture a new product. Direct materials cost for the new product will total $80 per unit. To have a place to store its finished goods, the company will rent a small warehouse for $500 per month. In addition, the company must rent equipment for $4,000 per month to produce the new product. Direct laborers will be hired and paid $60 per unit to manufacture the new product. As in prior years, the space in the annex will continue to be depreciated at $8,000 per year. The annual advertising cost for the new product will be $50,000. A supervisor will be hired and paid $3,500 per month to oversee production. Electricity for operating machines will be $1.20 per unit. The cost of shipping the new product to customers will be $9 per unit. To provide funds to purchase materials, meet payrolls, and so forth, the company will have to liquidate some temporary investments. These investments are presently yielding a return of $3,000 per year Using the table shown below, describe each of the costs associated with the new product decision in four ways. In terms of cost classifications for predicting cost behavior (column 1), indicate whether the cost is fixed or variable. With respect to cost classifications for manufacturers (column 2), if the item is a manufacturing cost, indicate whether it is direct materials, direct labor, or manufacturing overhead. If it is a nonmanufacturing cost, then select "none" as your answer. With respect to cost classifications for preparing financial statements (column 3), indicate whether the item is a product cost or period cost. Finally, in terms of cost classifications for decision making (column 4), identify any items that are sunk costs or opportunity costs. If you identify an item as an opportunity cost, then select "none" as your answer in columns 1-3 Cost Classifications for: Cost Item (1) Predicting Cost Behavior (2) Manufacturers (3) Preparing Financial Statements (4) Decision Making

1. Rental revenue forgone, $30,000 per year none none none Opportunity cost 2. Direct material cost, $80 per unit Variable Direct material Product cost None 3. Rental cost of warehouse, $500 per month Fixed none Period cost None 4. Rental cost of equipment, $4,000 per month Fixed Manufacturing overhead Product cost None 5. Direct labor cost, $60 per unit Variable Direct labor Product cost None 6. Depreciation of the annex space, $8,000 per year Fixed Manufacturing overhead Product cost Sunk Cost 7. Advertising cost, $50,000 per year Fixed none Period cost None 8. Supervisor's Salary, $3,500 per month Fixed Manufacturing overhead Product cost None 9. Electricity for machines, $1.20 per unit Variable Manufacturing overhead Product cost None 10. Shipping cost, $9 per unit Variable none Period cost None 11. Return earned on investment, $3,000 per year none none none Opportunity cost

Northeast Hospital's Radiology Department is considering replacing an old inefficient X-ray machine with a state-of-the-art digital X-ray machine. The new machine would provide higher quality X-rays in less time and at a lower cost per X-ray. It would also require less power and would use a color laser printer to produce easily readable X-ray images. Instead of investing the funds in the new X-ray machine, the Laboratory Department is lobbying the hospital's management to buy a new DNA analyzer. Required: For each of the items below, indicate by placing an X in the appropriate column whether it should be considered a differential cost, a sunk cost, or an opportunity cost in the decision to replace the old X-ray machine with a new machine. If none of the categories apply for a particular item, leave all columns blank. Differential Cost | Sunk Cost | Opportunity Cost Ex. Cost of X-ray film used in the old machine X 1. Cost of the old X-ray machine . . . . . . . . . . . . . . . . . . . . . . . 2. The salary of the head of the Radiology Department . . . 3. The salary of the head of the Laboratory Department . . . 4. Cost of the new color laser printer . . . . . . . . . . . . . . . . . . 5. Rent on the space occupied by Radiology . . . . . . . . . . . . . 6. The cost of maintaining the old machine . . . . . . . . . . . . . 7. Benefits from a new DNA analyzer . . . . . . . . . . . . . . . . . . . 8. Cost of electricity to run the X-ray machines .

1. The cost of old X-ray machine is sunk cost. The x-ray machine is purchased in past and it cannot be recovered again. Therefore, the cost incurred to purchase the old x-ray machine is sunk cost. 2. The salary of the head of the Radiology Department does not fall under any of the cost categories. The salary of the head cost is not incurred in the past as a whole. Therefore, it is not a sunk cost. The salary of the head cost will not differentiate under the two alternatives because the salary is fixed expense. Therefore, it is not a differential cost. There will be no sacrifice because there is no inflow on opting any of the alternatives. Therefore, salary of head of Radiology Department does not fall under any of the cost categories. 3. The salary of the head of the Pediatrics Department does not fall under any of the cost categories. The replacement is in Radiology Department and not Pediatrics Department. The salary cost of Pediatrics Department will not be considered in this decision making. 4. The cost of new laser printer will be differential cost. Amount will not be paid to acquire the new laser printer in case it is opted not to purchase the printer. The amount will be incurred only on purchase of printer. Therefore, cost of new laser printer is differential cost. 5. Rent cost for Radiology does not fall under any of the cost categories. The rent cost is not incurred in the past as a whole. Therefore, it is not a sunk cost. The rent cost will not differentiate under the two alternatives because the rent is fixed expense. Therefore, it is not a differential cost. There will be no sacrifice because there is no inflow on opting any of the alternatives. Therefore, rent cost does not fall under any of the cost categories. 6. The cost incurred for maintenance of the old machine is a differential cost. Amount will not be paid for maintenance of old machine in case it is opted to purchase the printer. The amount will be incurred only if new printer is not purchased. Therefore, cost of maintenance of old machine is differential cost. 7. The benefits form DNA analyzer is an opportunity cost. The amount to be incurred on acquisition of new printer can be utilized to buy a new DNA analyzer. In case it is opted to purchase the new printer, the benefit from the DNA analyzer shall be sacrificed. Therefore, the benefit from DNA analyzer is opportunity cost. 8. Cost of electricity to run the X-ray machine is a differential cost. The cost of electricity for x-ray machine need not be incurred in case it is opted to buy a new DNA analyzer. The amount will be incurred only if new printer is not purchased. Therefore, cost of electricity for x-ray machine is differential cost.

Average Fixed Cost Formula

Average Fixed Cost ​= Total Fixed Manufacturing Cost​ / Number of Units Produced =$8,000 / $40,000​= $5​ $5

Kubin Company's relevant range of production is 18,000 to 22,000 units. When it produces and sells 20,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . $7.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.00 Variable manufacturing overhead . . . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . . $5.00 Fixed selling expense . . . . . . . . . . . . . . . . . . . $3.50 Fixed administrative expense . . . . . . . . . . . . $2.50 Sales commissions . . . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . . $0.50 Assume the cost object is units of production: a. What is the total direct manufacturing cost incurred to make 20,000 units? b. What is the total indirect manufacturing cost incurred to make 20,000 units?

A). The direct materials and direct labor are required for calculating the total direct manufacturing cost per unit. Direct Materials = $7 per unit Direct Labor =$4 per unit The total direct manufacturing cost per unit is calculated by adding the per unit direct materials cost and direct labor cost. Total Direct Manufacturing Cost per Unit = Direct Materials + Direct Labor = $7 + $4 =$11 The total direct manufacturing cost is calculated by multiplying the total direct manufacturing cost per unit with the number of units. Total Direct Manufacturing Costs = Direct Manufacturing Cost per Unit × Number of Units = $11 ×20,000 units = $200,000 --------------------------------------- B). The total indirect manufacturing cost per unit is the total of variable manufacturing overhead of $1.50 and the fixed manufacturing overhead of $5.00. Total Indirect Manufacturing Cost per Unit = Variable Manufacturing Overhead + Fixed Manufacturing Overhead = $1.50 + $5.00 = $ 6.50 The total indirect manufacturing cost is calculated by multiplying the per unit indirect manufacturing cost with the number of units. Total Direct Manufacturing Costs = Total Indirect Manufacturing Cost per Unit × Number of Units =$6.50 × 20,000 units = $130,000

Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . $7.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.00 Variable manufacturing overhead . . . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . . $5.00 Fixed selling expense . . . . . . . . . . . . . . . . . . . $3.50 Fixed administrative expense . . . . . . . . . . . . $2.50 Sales commissions . . . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . . $0.50 A). For financial accounting purposes, what is the total amount of product costs incurred to make 20,000 units? B). For financial accounting purposes, what is the total amount of period costs incurred to sell 20,000 units?

A). The product cost per unit is calculated by adding the direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead. Product Cost per Unit = (Direct Materials + Direct Labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead) =$7.00 + $4.00 + $1.50 + $5.00 =$ 17.50 per Unit The total product cost is calculated by multiplying the product cost per unit of $17.50 with the number of units produced of 20,000. Total Product Cost = Units Produced × Product Cost per Unit = 20,000 × $17.50 = $350,000 ------------------------------- Per unit period cost is calculated by adding fixed selling expenses, fixed administrative expenses, sales commission, and variable administrative expenses. Period Costs per Unit = (Fixed Selling Expense + Fixed Administrative Expense + Sales Commissions + Variable Administrative Expense) =$3.50 + $2.50 + $1.00 + $0.50 =$7.50 Total period cost is calculated by multiplying per unit period cost with number of units sold. Total Period Costs = Units Sold × Period Cost per Unit =20,000 × $7.50 =$150,000

Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . $7.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.00 Variable manufacturing overhead . . . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . . $5.00 Fixed selling expense . . . . . . . . . . . . . . . . . . . $3.50 Fixed administrative expense . . . . . . . . . . . . $2.50 Sales commissions . . . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . . $0.50 A) If 18,000 units are produced, what is the average fixed manufacturing cost per unit produced? B). If 22,000 units are produced, what is the average fixed manufacturing cost per unit produced?

A). Total fixed manufacturing overhead is calculated by multiplying per unit fixed manufacturing overhead and number of units produced. Total Fixed Manufacturing Overhead = (Units Produced × Fixed Manufacturing Overhead per Unit) =20,000 × $5.00 = $100,000 Fixed manufacturing overhead per unit is calculated by dividing total fixed manufacturing overhead to number of units produced. Fixed Manufacturing Overhead per Unit = Total Fixed Manufacturing Overhead / Units Produced =$100,000 / 18,000 =$5.56 per Unit -------------- To calculate per unit fixed manufacturing overhead, total fixed manufacturing overhead should be identified. Total Fixed Manufacturing Overhead = $100,000Total Fixed Manufacturing Overhead ​ = $100,000​ Fixed manufacturing overhead per unit is calculated by dividing total fixed manufacturing overhead by number of units produced. Fixed Manufacturing Overhead per Unit = Total Fixed Manufacturing Overhead / Units Produced = $100,000 / 22,000 =$4.55 per Unit

Kubin Company's relevant range of production is 18,000 to 22,000 units. When it produces and sells 20,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . $7.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.00 Variable manufacturing overhead . . . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . . $5.00 Fixed selling expense . . . . . . . . . . . . . . . . . . . $3.50 Fixed administrative expense . . . . . . . . . . . . $2.50 Sales commissions . . . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . . $0.50 Assume the cost object is units of production: Assume the cost object is the Manufacturing Department and that its total output is 20,000 units. a. How much total manufacturing cost is directly traceable to the Manufacturing Department? b. How much total manufacturing cost is an indirect cost that cannot be easily traced to the Manufacturing Department?

A).The direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead are directly traceable costs. The total traceable manufacturing costs per unit is calculated as follows: Total Traceable Manufacturing Costs per Unit = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead =$7.00 + $4.00 + $1.50 + $5.00 = $17.50 The total traceable manufacturing cost is calculated by multiplying the total traceable manufacturing cost per unit with the number of units. Total Traceable Manufacturing Cost = Total Traceable Manufacturing Costs per Unit × Number of Units =$17.50×20,000 =$350,000 -------------- Manufacturing costs are direct costs that are assigned to the product. Therefore, no part of the indirect costs are assigned to the total manufacturing costs. Cost incurred by the company is related to the product manufactured by the company, and it will be treated as a direct cost.

What is meant by an activity base when dealing with variable costs? Give several examples of activity bases.

Activity base is the level or type of activity that results to incurring variable costs. Some examples of activity bases are direct labor hours, units produced, units sold, machine hours, letters typed, beds in a hospital, and service calls made. Variable costs are those expenses that will change when the number of units produced changes. The number of units is the reason why variable costs change. For example, direct materials will vary directly with the number of units produced.

The Devon Motor Company produces automobiles. On April 1st the company had no beginning inventories and it purchased 8,000 batteries at a cost of $80 per battery. It withdrew 7,600 batteries from the storeroom during the month. Of these, 100 were used to replace batteries in cars being used by the company's traveling sales staff. The remaining 7,500 batteries withdrawn from the storeroom were placed in cars being produced by the company. Of the cars in production during April, 90% were completed and transferred from work in process to finished goods. Of the cars completed during the month, 30% were unsold at April 30th. Specify whether each of the above accounts would appear on the balance sheet or on the income statement at the end of the month.

Balance sheet: Inventory of raw material, finished goods. work in process The balance sheet reports assets owned by a company, equity stock, and liabilities outstanding at a particular date. Inventories will be classified as current assets in the balance sheet. Income statement: Cost of goods sold and selling expense Selling expense The income statement shows the financial performance of the company. Cost of goods sold and other expenses are deducted from the sales revenue to arrive at the net income.

Product Cost Formula

Direct Labor Cost per Unit+ +Direct Material Cost per Unit +Manufacturing Overhead per Unit * (# of units)

Total Direct Manufacturing Costs​

Direct Manufacturing Cost per Unit× Number of Units

Variable Cost per Unit​ Formula

Direct Material + Direct Labor + Variable Manufacturing Overhead + Sales Commissions + Variable Administrative Expense​

Total Direct Manufacturing Cost per Unit Formula

Direct Materials + Direct Labor

Total Traceable Manufacturing Costs per Unit Formula

Direct Materials + Direct Labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead

Product Cost per Unit​ Formula

Direct Materials + Direct Labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead​

Northwest Hospital is a full-service hospital that provides everything from major surgery and emergency room care to outpatient clinics. Required: For each cost incurred at Northwest Hospital, indicate whether it would most likely be a direct cost or an indirect cost of the specified cost object by placing an X in the appropriate column. Ex. Catered food served to patients A particular patient X 1. The wages of pediatric nurses The pediatric department 2. Prescription drugs A particular patient 3. Heating the hospital The pediatric department 4. The salary of the head of pediatrics The pediatric department 5. The salary of the head of pediatrics A particular pediatric patient 6. Hospital chaplain's salary A particular patient 7. Lab tests by outside contractor A particular patient 8. Lab tests by outside contractor A particular department

Direct cost: 1, 2, 4, 7, 8 Costs that can be directly identified with the given cost objects are known as direct costs. Wages of pediatric nurse can be identified for the pediatric department. Drug prescription to each patient can be identified. Salary of the pediatric department head can be identified for the entire department as a whole. Lab tests of a particular patient and for the department can also be directly identified. --------------- Indirect cost: 3, 5, 6 Costs that cannot be directly identified with the given cost objects are known as indirect costs. Costs incurred for heating the entire hospital cannot be identified separately for different departments. The salary paid to the head of the pediatric department cannot be allocated to a particular pediatric department because the head receives salary for the department as a whole. Chaplain's salary paid is to support hospital operations, and therefore, it cannot be identified for each department in the hospital.

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $6.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50 Variable manufacturing overhead . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . $4.00 Fixed selling expense . . . . . . . . . . . . . . . . . . $3.00 Fixed administrative expense . . . . . . . . . . . $2.00 Sales commissions . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . $0.50 If 11,000 units are produced, what are the total amounts of direct and indirect manufacturing costs incurred to support this level of production?

Direct manufacturing cost is calculated by adding per unit direct material cost and direct labor cost and then multiplying the total amount with the number of units. Direct Manufacturing Cost = (Direct Material Cost per Unit + Direct Labor Cost per Unit) × Number of Units =($6 + $3.5) × 11,000 =$104,500 ----------- Indirect manufacturing cost is calculated by adding the total variable manufacturing overhead and fixed manufacturing overhead. Total variable manufacturing overhead and fixed manufacturing overhead are calculated by multiplying the per unit overhead and number of units. Indirect Manufacturing Cost = ((Variable Manufacturing Overhead per Unit × Number of Units) + (Fixed Manufacturing Overhead per Unit × Actual Number of Units)) =($1.5 × 11,000)+($4 × 10,000)= $56,500 ------------- Total Direct Manufacturing Cost = $104,500 Total Indirect Manufacturing Cost = $56,500

The PC Works assembles custom computers from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a single facility in a Redmond, Washington, industrial park. Listed below are some of the costs that the company incurs. Required: For each cost, indicate whether it would most likely be classified as direct materials, direct labor, manufacturing overhead, selling, or an administrative cost. 1. The cost of a hard drive installed in a computer. 2. The cost of advertising in the Puget Sound Computer User newspaper. 3. The wages of employees who assemble computers from components. 4. Sales commissions paid to the company's salespeople. 5. The salary of the assembly shop's supervisor. 6. The salary of the company's accountant. 7. Depreciation on equipment used to test assembled computers before release to customers. 8. Rent on the facility in the industrial park.

Direct material: 1 The prime business of the company is to assemble the computer parts, and the cost of a hard drive, which is installed in the computer, is direct material cost. Direct labor: 3 Wages are related to employees who are involved in the assembly process, and thus, it is a direct labor cost. Manufacturing overhead: 5, 7, 8 Salary is related indirectly to the assembly process; thus, it falls under the manufacturing overhead. Depreciation cannot be directly associated with any particular assembly process and is an indirect cost, i.e., manufacturing overhead. The facility is also used as the assembly shop, thus, it falls under manufacturing overhead. Selling cost: 2, 4, 8 The advertising cost is incurred to increase the sales and, thus, falls under selling expenses. The sales commission is paid on sales made by the salesperson; thus, it is related to selling expenses. The facility is utilized as an assembly shop and retail sales store; thus, a part of the facility cost comes under the selling cost. Administrative cost: 6, 8 The accounting process is the support activity, and cost related to accounting comes under the administrative cost. The facility is utilized as an assembly shop and retail sales store; thus, a part of the facility cost comes under the administrative overhead.

What are the three major types of product costs in a manufacturing company?

Direct material: Direct materials are the raw materials used in manufacturing products. direct labor: consists of the salaries and wages paid to the employees working in the production process of products. manufacturing overhead: Indirect costs, i.e., they are not directly identifiable to products produced.

Distinguish between discretionary fixed costs and committed fixed costs.

Discretionary fixed costs are period-specific costs that can be eliminated or reduced without having a direct impact on profitability, whereas committed fixed costs are costs that a business has already made or obliged to make in the future, and thus cannot be recovered. Discretionary fixed costs have a short-term planning horizon unlike committed fixed costs that have a long-term planning horizon. Avoidance or reduction of a discretionary fixed cost for a relatively long period of time can adversely affect the company's competitiveness, whereas not honoring the payment of committed fixed costs may result in legal allegations by the affected party.

Cherokee Inc. is a merchandiser that provided the following information: Amount Number of units sold . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Selling price per unit . . . . . . . . . . . . . . . . . . . . . . . . . . $30 Variable selling expense per unit . . . . . . . . . . . . . . . $4 Variable administrative expense per unit . . . . . . . . . $2 Total fixed selling expense . . . . . . . . . . . . . . . . . . . . . $40,000 Total fixed administrative expense . . . . . . . . . . . . . . $30,000 Beginning merchandise inventory . . . . . . . . . . . . . $24,000 Ending merchandise inventory . . . . . . . . . . . . . . . . . $44,000 Merchandise purchases . . . . . . . . . . . . . . . . . . . . . . . $180,000 Required: 2. Prepare a contribution format income statement.

Global Explanation: Contribution margin is the difference between sales revenue and variable expenses; it is the amount that is available to pay the fixed expenses of the business organization. Step 1: Total variable selling expenses are calculated by multiplying per unit variable selling expenses and number of units sold Variable Selling Expenses = Number of Units Sold × Variable Selling Expenses Per Unit = 20,000 units × $4 = $80,000 ------------------ Total variable administration expenses are calculated by multiplying per unit variable administration expenses and number of units sold. Variable Administration Expenses = (Administration Expense per Unit × Number of Units Sold) = $2 × 20,000 Units = $40,000 ------------- Sales: $600,000 (rhs) Variable Expenses: COGS: $160,00 (lhs) Selling Expenses: $80.,000 (lhs) Administrative Expenses: $40.,000 (lhs) Total Variable Expenses: $280,000 (rhs) Contribution Margin: $320,000 (rhs) Fixed Expenses Selling Expenses: $40,000 (lhs) Administrative Expenses: $30,000 (;hs) Total Fixed Expenses: $70,000 (rhs) NOI: $250,000 (rhs)

The Alpine House, Inc., is a large retailer of snow skis. The company assembled the information shown below for the quarter ended March 31: Amount Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000 Selling price per pair of skis . . . . . . . . . . . . . . . . . . . . $750 Variable selling expense per pair of skis. . . . . . . . . . $50 Variable administrative expense per pair of skis. . . $10 Total fixed selling expense . . . . . . . . . . . . . . . . . . . . . $20,000 Total fixed administrative expense. . . . . . . . . . . . . . . $20,000 Beginning merchandise inventory . . . . . . . . . . . . . . . $30,000 Ending merchandise inventory. . . . . . . . . . . . . . . . . . $40,000 Merchandise purchases. . . . . . . . . . . . . . . . . . . . . . . . $100,000 Prepare a contribution format income statement for the quarter ended March 31

Global Explanation: Contribution margin is the difference between the sales revenue and the total variable expenses. Step 1: Variable selling expenses are calculated by multiplying per unit variable cost and number of units. Variable Selling Expenses = Variable Cost per Unit × Number of Units =$50 × 200 Units = $10,000 Step 2 of 2 Variable administrative expenses are calculated by multiplying per unit administrative expenses and number of units. Variable Administrative Expenses =Administrative Expenses per Unit × Number of Units =$10 × 200 Units =$2,000 Sales: $150,000 (rhs) Variable Expenses: COGS: $90.,000 (lhs) Selling Expenses: $10,000 (lhs) Administrative Expenses: $2,000 (lhs) Total Variable Expenses :$102,000 (rhs) Contribution Margin: $48,000 (rhs) Fixed Expenses Selling Expenses: $20.,000 (lhs) Administrative Expenses: $20.,000 (lhs) Total Fixed Expenses: $40.,000 (rhs) NOI: $8.,000 (rhs)

Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $1,200 and the variable cost per cup of coffee served is $0.22. Required: 1. Fill in the following table with your estimates of the company's total cost and average cost per cup of coffee at the indicated levels of activity. Round off the average cost per cup of coffee to the nearest tenth of a cent. Cups of Coffee Served in a Week 2,000 2,100 2,200 Fixed cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? ? ? Variable cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? ? ? Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? ? ? Average cost per cup of coffee served . . . . . . . ? ? ? 2. Does the average cost per cup of coffee served increase, decrease, or remain the same as the number of cups of coffee served in a week increases? Explain.

Global Explanation: Fixed cost remains the same for any changes in the level of production or sales, whereas variable cost increases with an increase in the level of output. Step 1: Total variable cost is calculated by multiplying the per unit variable cost with number of units. Variable Cost = Variable Cost per Unit × Number of Units For 2,000 Units = $0.22 × 2,000= $440 For 2,100 Units =$1,200 + $462 = $1,662 For 2,200 Units = $1,200 + $484 = $1,684 ---------------- ​​ Average cost is calculated by dividing the total cost by the number of cups of coffee sold. Average Cost = Total Cost / Number of Units For 2,000 Units = $1,64 / 2,000 =$0.82 For 2,100 Units = $1,662 / 2,100= $0.79 For 2,200 Units = $1,684 / 2,200 = $0.77 --------------------- Variable costs are dependent on the level of output and will increase with an increase in the number of units. However, fixed cost remains constant and spreads over a larger number of units. When the number of units increases, the fixed cost has to be divided among more units, and therefore, the average cost per unit decreases. Average cost per unit decreases with an increase in the number of units. This is because the average cost per unit is computed by dividing the total cost by the number of cups of coffee sold.

Cherokee Inc. is a merchandiser that provided the following information: Amount Number of units sold . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Selling price per unit . . . . . . . . . . . . . . . . . . . . . . . . . . $30 Variable selling expense per unit . . . . . . . . . . . . . . . $4 Variable administrative expense per unit . . . . . . . . . $2 Total fixed selling expense . . . . . . . . . . . . . . . . . . . . . $40,000 Total fixed administrative expense . . . . . . . . . . . . . . $30,000 Beginning merchandise inventory . . . . . . . . . . . . . $24,000 Ending merchandise inventory . . . . . . . . . . . . . . . . . $44,000 Merchandise purchases . . . . . . . . . . . . . . . . . . . . . . . $180,000 Required: 1. Prepare a traditional income statement.

Global Explanation: Net operating income is the net revenue of the business organization from operational activities after deducting the cost of goods sold of $160,000 and the operating expenses of $190,000 from the sales revenue of $600,000 (20,000units × $3020,000 units × $30). Step 1: Cost of goods sold is calculated by adding the opening merchandise and purchases and then deducting closing merchandise from the sum. Cost of Goods Sold = (Opening Merchandise + Purchases − Closing Merchandise) = $24,000 + $180,000 −$44,000 = $160,000 ----------------------- Total selling expenses are calculated by adding fixed selling expenses and variable selling expenses. Total Selling Expenses = Fixed Selling Expenses + Variable Selling Expenses = $40,000 + ($4 × 20,000) =$40,000+ $80,000 = $120,000 ------------------------- Total administrative expenses are calculated by adding fixed administrative expenses and variable administrative expenses. Total Administrative Expenses = (Fixed Administrative Expenses + Variable Administrative Expenses) = $30,000 + ($2 ×20,000) =$70,000 Sales: $600,000 (rhs) COGS: $160.,000 (rhs) Gross Profit: $440.,000 (rhs) Expenses: Selling Expenses: $120.,000 (lhs) Administrative Expenses: $70.,000 (lhs) Total Expenses: $190.,000 (rhs) NOI: $250.,000 (rhs)

The Alpine House, Inc., is a large retailer of snow skis. The company assembled the information shown below for the quarter ended March 31: Amount Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000 Selling price per pair of skis . . . . . . . . . . . . . . . . . . . . $750 Variable selling expense per pair of skis. . . . . . . . . . $50 Variable administrative expense per pair of skis. . . $10 Total fixed selling expense . . . . . . . . . . . . . . . . . . . . . $20,000 Total fixed administrative expense. . . . . . . . . . . . . . . $20,000 Beginning merchandise inventory . . . . . . . . . . . . . . . $30,000 Ending merchandise inventory. . . . . . . . . . . . . . . . . . $40,000 Merchandise purchases. . . . . . . . . . . . . . . . . . . . . . . . $100,000 Prepare a traditional income statement for the quarter ended March 31.

Global Explanation: The net operating income is the net revenue earned by the business organization from its operational activities after deducting all fixed and variable expenses incurred. Step 1: Cost of goods sold is calculated by adding opening inventory and purchases and deducting closing inventory from the sum. Cost of Goods Sold = (Opening Inventory + Purchases)−Closing Inventory =($30,000 + $100,000) − $40,000 =$90,000 Step 2 of 3 Total selling expenses are calculated by adding fixed selling expenses and variable selling expenses. Total Selling Expenses = Fixed Selling Expenses + Variable Selling Expenses= $20,000+($50 × 200) = $20,000 + $10,000 = $30,000 Step 3 of 3 Total administrative expenses are calculated by adding fixed administrative expenses and variable administrative expenses Total Administrative Expenses = (Variable Administrative Expenses + Fixed Administrative Expenses) =($10×200 units) + $20,000 = $22,000 ----------- Sales: $150,000 (rhs) COGS: $90,000 (rhs) Gross Margin: $60,000 (rhs) Expenses: Selling Expenses: $30,000 (lhs) Administrative Expenses: $22,000 (lhs) NOI: $8,000 (rhs)

Managers often assume a strictly linear relationship between cost and the level of activity. Under what conditions would this be a valid or invalid assumption?

Managers assume that there exists a linear relationship between costs and activity level in that when the cost of production increases, the level of activity also increases and vice versa. This assumption is valid only when the costs being related are variable.

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $6.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50 Variable manufacturing overhead . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . $4.00 Fixed selling expense . . . . . . . . . . . . . . . . . . $3.00 Fixed administrative expense . . . . . . . . . . . $2.00 Sales commissions . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . $0.50 What incremental manufacturing cost will Martinez incur if it increases production from 10,000 to 10,001 units?

Manufacturing cost for 10,000 units is calculated by adding the total variable manufacturing overheads and total fixed manufacturing overheads. Total variable manufacturing overhead is calculated by multiplying the total of per unit direct material cost, direct labor cost, and variable manufacturing overhead with the number of units, and total fixed manufacturing overhead is calculated by multiplying fixed manufacturing overhead with the number of units. Manufacturing Cost = (((Direct Materials per Unit + Direct Labor per Unit + Variable Manufacturing Overhead per Unit) × Number of Units) + (Fixed Manufacturing Overhead per Unit × Actual Units)) =(($6 + $3.5 + $1.5) × 10,000)+($4×10,000)=$110,000+$40,000=$150,000 ----------------- Manufacturing cost for 10,001 units is calculated by adding the total variable manufacturing overheads and total fixed manufacturing overheads. Total variable manufacturing overhead is calculated by multiplying the total of per unit direct material cost, direct labor cost, and variable manufacturing overhead with the number of units, and the total fixed manufacturing overhead is calculated by multiplying fixed manufacturing overhead with the number of units. Manufacturing Cost = (((Direct Materials Per Unit + Direct Labor per Unit + Variable Manufacturing Overhead per Unit) × Number of Units)+(Fixed Manufacturing Overhead Per Unit × Actual Units)) =(($6+$3.5+$1.5) × 10,001) + ($4 × 10,000) = $110,011 + $40,000 = $150,011 ---------------- Incremental manufacturing cost is calculated by deducting manufacturing cost of 10,000 units from manufacturing cost of 10,001 units. Incremental Manufacturing Cost = (Manufacturing Cost of 10,001 Units − Manufacturing Cost of 10,000 Units) =$150,011 − $150,000 = $11 = $11

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $6.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50 Variable manufacturing overhead . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . $4.00 Fixed selling expense . . . . . . . . . . . . . . . . . . $3.00 Fixed administrative expense . . . . . . . . . . . $2.00 Sales commissions . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . $0.50 For financial accounting purposes, what is the total amount of product costs incurred to make 10,000 units?

Manufacturing overhead for each unit is calculated by adding per unit variable manufacturing overhead and fixed manufacturing overhead. ----> Manufacturing Overhead per Unit​= (Variable Manufacturing Overhead + Fixed Manufacturing Overhead​)=$1.5+$4=$5.5​ Product cost is calculated by adding per unit direct labor cost, direct material cost, and manufacturing overhead and then multiplying the total amount with the number of units. ----->> Product Cost​=​ Direct Labor Cost per Unit + Direct Material Cost per Unit + Manufacturing Overhead per Unit​​×Number of Units =($6+$3.5+$5.5)× 10,000units = $150,000​ $150,000

Kubin Company's relevant range of production is 18,000 to 22,000 units. When it produces and sells 20,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . $7.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.00 Variable manufacturing overhead . . . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . . $5.00 Fixed selling expense . . . . . . . . . . . . . . . . . . . $3.50 Fixed administrative expense . . . . . . . . . . . . $2.50 Sales commissions . . . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . . $0.50 Are Kubin's administrative expenses always going to be treated as indirect costs in its internal management reports?

No. Apportionment of administrative expenses depends on the cost object of the company. These expenses are incurred by the company on its daily operations.

Only variable costs can be differential costs. Do you agree? Explain.

No. Differential cost is not distinguished between fixed cost and variable cost. It calculates the difference between the total costs of two alternative Differential cost can be fixed cost, variable cost, or both fixed and variable costs. The objective of differential cost is to calculate the change in output.

Variable Selling Expenses Formula

Number of Units Sold × Variable Selling Expenses Per Unit

Suppose that you have been given a summer job as an intern at Issac Aircams, a company that manufactures sophisticated spy cameras for remote-controlled military reconnaissance aircraft. The company, which is privately owned, has approached a bank for a loan to help finance its growth. The bank requires financial statements before approving the loan. Required: Classify each cost listed below as either a product cost or a period cost for the purpose of preparing financial statements for the bank. 1. Depreciation on salespersons' cars. 2. Rent on equipment used in the factory3. Lubricants used for machine maintenance. 4. Salaries of personnel who work in the finished goods warehouse. 5. Soap and paper towels used by factory workers at the end of a shift. 6. Factory supervisors' salaries. 7. Heat, water, and power consumed in the factory. 8. Materials used for boxing products for shipment overseas. (Units are not normally boxed.) 9. Advertising costs. 10. Workers' compensation insurance for factory employees. 11. Depreciation on chairs and tables in the factory lunchroom. 12. The wages of the receptionist in the administrative offices. 13. Cost of leasing the corporate jet used by the company's executives. 14. The cost of renting rooms at a Florida resort for the annual sales conference. 15. The cost of packaging the company's product.

Product cost: 10, 15, 2, 3, 5, 6, 7 Product costs are expenses connected with manufacturing or purchase of a product. Direct materials, direct labor, manufacturing overheads such as depreciation on factory' assets, assembling, packaging, etc., are product costs. ------------------- Period cost: 1, 12, 13, 14, 4, 8, 9 Costs that are not required for manufacturing or purchasing a product are known as period costs, and they will be charged as expenses in the same period when they are incurred. Only the depreciation on fixed assets used in a factory is a manufacturing overhead; salesmen's cars are therefore a period cost. A warehouse is used to store finished goods and other inventory and is not required to manufacture a product; therefore, it is a period cost.

Does the concept of the relevant range apply to fixed costs? Explain.

Relevant range is the level of activity set within which fixed costs remain the same irrespective of any changes in the level of output. Yes. When there are changes in the level of activity after the relevant range, the level of fixed cost also changes to support the change in operations. For example, a widget manufacturer's fixed cost is $100,000 per month for producing between 20,000 and 40,000 widgets. If he/she gets an additional order of 30,000 units, they have to pay additional fixed cost for assembling the new line and increase the fixed cost after a certain relevant range to continue operations.

Total Direct Selling Expense Formula

Sales Representative Compensation + Sales Commission

Period Cost Formula

Selling Expenses + Administrative Expenses

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $6.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50 Variable manufacturing overhead . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . $4.00 Fixed selling expense . . . . . . . . . . . . . . . . . . $3.00 Fixed administrative expense . . . . . . . . . . . $2.00 Sales commissions . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . $0.50 For financial accounting purposes, what is the total amount of period costs incurred to sell 10,000 units?

Selling expenses is calculated by adding per unit fixed selling expense and sales commission and then multiplying the total amount with the number of units. Selling Expenses ​= (Fixed Selling Expenses per Unit + Sales Commission per Unit​) × Number of Units ----->>> =($3+$1)×10,000 Units = $40,000 ​Administrative expenses is calculated by adding per unit fixed administrative expense and variable administrative expenses and then multiplying the total amount with the number of units. Administrative Expenses​ = (Fixed Administrative Expenses per Unit + Variable Administrative Expenses per Unit​) × Number of Units --->>> =($2+$0.5)×10,000 Units=$25,000​ Period cost is calculated by adding selling expenses and administrative expenses. Period Cost =Selling Expenses + Administrative Expenses= $40,000 + $25,000 = $65,000 $65,000

The Devon Motor Company produces automobiles. On April 1st the company had no beginning inventories and it purchased 8,000 batteries at a cost of $80 per battery. It withdrew 7,600 batteries from the storeroom during the month. Of these, 100 were used to replace batteries in cars being used by the company's traveling sales staff. The remaining 7,500 batteries withdrawn from the storeroom were placed in cars being produced by the company. Of the cars in production during April, 90% were completed and transferred from work in process to finished goods. Of the cars completed during the month, 30% were unsold at April 30th. Determine the cost of batteries that would appear in each of the following accounts on April 30th. C). COGS

Step 1 of 2 To calculate cost of goods sold, items that need to be identified are motorcycles sold and cost per battery. Motorcycles Sold = 4,725 Cost per Battery=$80 Step 2 of 2 Cost of goods sold on April 30 is calculated by multiplying motorcycles sold and cost per battery. Cost of Goods Sold = Motorcycles Sold × Cost per Battery = 4,725 × $80 = $378,000

The Devon Motor Company produces automobiles. On April 1st the company had no beginning inventories and it purchased 8,000 batteries at a cost of $80 per battery. It withdrew 7,600 batteries from the storeroom during the month. Of these, 100 were used to replace batteries in cars being used by the company's traveling sales staff. The remaining 7,500 batteries withdrawn from the storeroom were placed in cars being produced by the company. Of the cars in production during April, 90% were completed and transferred from work in process to finished goods. Of the cars completed during the month, 30% were unsold at April 30th. Determine the cost of batteries that would appear in each of the following accounts on April 30th. C). Selling Expense

Step 1 of 2 To calculate selling expense, items that need to be determined are batteries used by salesperson and cost per battery. Batteries Used = 100 Cost per Battery= $80 Step 2 of 2 Selling expense on April 30 is calculated by multiplying batteries used and cost per battery Selling Expense = Batteries Used × Cost per Battery =100 × $80 =$8,000

The Devon Motor Company produces automobiles. On April 1st the company had no beginning inventories and it purchased 8,000 batteries at a cost of $80 per battery. It withdrew 7,600 batteries from the storeroom during the month. Of these, 100 were used to replace batteries in cars being used by the company's traveling sales staff. The remaining 7,500 batteries withdrawn from the storeroom were placed in cars being produced by the company. Of the cars in production during April, 90% were completed and transferred from work in process to finished goods. Of the cars completed during the month, 30% were unsold at April 30th. Determine the cost of batteries that would appear in each of the following accounts on April 30th. A). Raw Materials

Step 1 of 3 To calculate the number of batteries remaining in the inventory, items that need to be identified are batteries purchased and batteries drawn from inventory. Batteries Purchased=8,000 Batteries Drawn from Inventory=7,600 Step 2 of 3 Batteries remaining in inventory are calculated by deducting batteries drawn from inventory from batteries purchased. Batteries Remaining in Inventory = Batteries Purchased − Batteries Drawn from Inventory =8,000 − 7,600 = 400 Batteries Remaining in Inventory Step 3 of 3 Cost of raw material inventory is calculated by multiplying batteries remaining in inventory and per battery cost. Cost in Raw Material Inventory = Batteries Remaining in Inventory × Cost per Battery = 400 × $80=$32,000

The Devon Motor Company produces automobiles. On April 1st the company had no beginning inventories and it purchased 8,000 batteries at a cost of $80 per battery. It withdrew 7,600 batteries from the storeroom during the month. Of these, 100 were used to replace batteries in cars being used by the company's traveling sales staff. The remaining 7,500 batteries withdrawn from the storeroom were placed in cars being produced by the company. Of the cars in production during April, 90% were completed and transferred from work in process to finished goods. Of the cars completed during the month, 30% were unsold at April 30th. Determine the cost of batteries that would appear in each of the following accounts on April 30th. B). Work in Process

Step 1 of 3 Batteries used in production are calculated by deducting the number of batteries replaced from batteries drawn from inventory. Batteries Used in Production = Batteries Drawn form Inventories − Batteries Replaced =7,600 − 100= 7,500 Batteries Used in Production Step 2 of 3 Work in process is calculated by multiplying material used in production and the non-competition rate. Work in Process = Materials Used in Production × Noncompetition Rate = 7,500 × (100−90)% = 750 Step 3 of 3 Cost of work in process is calculated by multiplying inventory in work in process and cost per battery. Cost of Work in Process = Inventory in Work in Process × Cost per Battery = 750 × $80 = $60,000

The Alpine House, Inc., is a large retailer of snow skis. The company assembled the information shown below for the quarter ended March 31: Amount Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000 Selling price per pair of skis . . . . . . . . . . . . . . . . . . . . $750 Variable selling expense per pair of skis. . . . . . . . . . $50 Variable administrative expense per pair of skis. . . $10 Total fixed selling expense . . . . . . . . . . . . . . . . . . . . . $20,000 Total fixed administrative expense. . . . . . . . . . . . . . . $20,000 Beginning merchandise inventory . . . . . . . . . . . . . . . $30,000 Ending merchandise inventory. . . . . . . . . . . . . . . . . . $40,000 Merchandise purchases. . . . . . . . . . . . . . . . . . . . . . . . $100,000 What was the contribution margin per unit?

Step 1 of 3 Contribution margin is calculated by deducting variable expenses from sales. Contribution Margin= Sales − Variable Expenses =$150,000 − $102,000 =$48,000 Step 2 of 3 Number of units sold is calculated by dividing sales by per unit selling price. Number of Units Sold = Sales / Selling Price per Unit =$150,000 / 30=$750= 200 Units ​ Step 3 of 3 Contribution margin per unit is calculated by dividing contribution margin by number of units sold. Contribution Margin per Unit= Contribution Margin / Number of Units Sold =$48,000 / 200 Units =$240 per Unit

The Devon Motor Company produces automobiles. On April 1st the company had no beginning inventories and it purchased 8,000 batteries at a cost of $80 per battery. It withdrew 7,600 batteries from the storeroom during the month. Of these, 100 were used to replace batteries in cars being used by the company's traveling sales staff. The remaining 7,500 batteries withdrawn from the storeroom were placed in cars being produced by the company. Of the cars in production during April, 90% were completed and transferred from work in process to finished goods. Of the cars completed during the month, 30% were unsold at April 30th. Determine the cost of batteries that would appear in each of the following accounts on April 30th. C). Finished Goods

Step 1 of 3 The number of motorcycles unsold is calculated by multiplying finished goods and the rate of goods not sold. Motorcycle Sold = Finished Goods × Rate of Sales =6,750 ×70% =4,725 Step 2 of 3 Unsold goods are calculated by multiplying the number of finished goods and goods sold. Unsold Goods= Finished Goods − Sold Goods = 6,750−4,725 = 2,025 Step 3 of 3 Cost of finished goods inventory at April 30 is calculated by multiplying the number of unsold goods and cost per battery. Cost of Finished Goods Inventory = Unsold Goods × Cost per Battery = 2,025 × $80= $162,000

Munchak Company's relevant range of production is between 9,000 and 11,000 units. Last month the company produced 10,000 units. Its total manufacturing cost per unit produced was $70. At this level of activity the company's variable manufacturing costs are 40% of its total manufacturing costs. Assume that next month Munchak produces 10,050 units and that its cost behavior patterns remain unchanged. Label each of the following statements as true or false with respect to next month. Do not use a calculator to answer items 1 through 6. You can use a calculator to answer items 7 through 12. Record your answers by placing an X under the appropriate heading. True | False 1. The variable manufacturing cost per unit will remain the same as last month. 2. The total fixed manufacturing cost will be greater than last month. 3. The total manufacturing cost will be greater than last month. 4. The average fixed manufacturing cost per unit will be less than last month. 5. The total variable manufacturing cost will be less than last month. 6. The total manufacturing cost per unit will be greater than last month. 7. The variable manufacturing cost per unit will equal $28. 8. The total fixed manufacturing cost will equal $422,100. 9. The total manufacturing cost will equal $701,400. 10. The average fixed manufacturing cost per unit (rounded to the nearest cent) will equal $41.79. 11. The total variable manufacturing cost will equal $280,000. 12. The total manufacturing cost per unit (rounded to the nearest cent) will equal $69.79.

Step 1 of 6 Global explanation: The variable manufacturing cost per unit is constant for all levels of output. Total fixed cost remains the same for a specified period up to a specified production limit. Total manufacturing cost is increased because of an increase in production. The average fixed manufacturing cost per unit decreases with an increase in production. Total variable manufacturing cost is more than that of last month because of the production increase. Total variable manufacturing cost per unit remains constant for all levels of output, but average fixed manufacturing cost per unit decreases with an increase in the level of activity. Step 1: Variable manufacturing overhead cost per unit is calculated as follows: Variable Manufacturing Overhead Cost per Unit = Total Manufacturing Cost × Variable Percentage = $70 × 40% = $28Variable Manufacturing Overhead Cost per Unit​=Total Manufacturing Cost × Variable Percentage=$70×40%=$28​ Step 2 of 6 The total fixed manufacturing cost is calculated as follows: Fixed Cost per Unit = (Total Manufacturing Cost − Variable Manufacturing Cost) = $70 − $28 = $42 Total Fixed Manufacturing Cost = Number of Units × Per Unit Cost =10,000 × $42 = $420,000 Step 3 of 6 The total manufacturing cost is calculated as follows: Total Variable Manufacturing Cost =(Number of Units × Variable Cost per Unit) =10,050 × $28 =$ 281,400 Total Manufacturing Cost =(Total Variable Cost + Total Fixed Cost) =$281,400 + $420,000 =$701,400 Step 4 of 6 The average fixed manufacturing cost per unit is calculated as follows: (Average Fixed Manufacturing Cost per Unit) =Total Fixed Cost / Number of Units =420,000 / 10,050 =$41.79 Step 5 of 6 The total variable manufacturing overhead cost is calculated as follows: Total Variable Manufacturing Cost =(Variable Manufacturing Cost per Unit × Number of Units) =$28 × 10,050 = $281,400 ​ Step 6 of 6 The total manufacturing cost per unit is calculated as follows Total Manufacturing Cost per Unit =(Variable Cost per Unit + Average Fixed Cost) = $28 + $41.79 =$69.79 1. True 2. False 3. True 4. True 5. False 6. False 7. True 8. False 9. True 10. True 11. False 12. True

Kubin Company's relevant range of production is 18,000 to 22,000 units. When it produces and sells 20,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . $7.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.00 Variable manufacturing overhead . . . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . . $5.00 Fixed selling expense . . . . . . . . . . . . . . . . . . . $3.50 Fixed administrative expense . . . . . . . . . . . . $2.50 Sales commissions . . . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . . $0.50 Assume the cost object is the company's various sales representatives. Furthermore, assume that the company spent $50,000 of its total fixed selling expense on advertising and the remainder of the total fixed selling expense comprised the fixed portion of the company's sales representatives' compensation. a. When the company sells 20,000 units, what is the total direct selling expense that can be readily traced to individual sales representatives? b. When the company sells 20,000 units, what is the total indirect selling expense that cannot be readily traced to individual sales representatives?

The total fixed selling expense is calculated by multiplying the fixed selling expenses per unit with the number of units. Sales representative compensation is calculated by deducting advertisement expense from fixed selling expenses. Sales Representative Compensation = (Fixed Selling Expense − Advertisement Expense) =($3.50 × 20,000) − $50,000 = $70,000 −$50,000 = $20,000 Total direct selling expenses are calculated by adding the sales representative compensation and sales commission. Total Direct Selling Expense = Sales Representative Compensation + Sales Commission =$20,000 + $20,000 = $40,000 ------------------------- Advertisement expense that is spent by the company will be considered as the total indirect selling expense because this is the only selling expense that cannot be easily traced to individual sales representatives. $50,000 of advertisement expense.

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $6.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50 Variable manufacturing overhead . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . $4.00 Fixed selling expense . . . . . . . . . . . . . . . . . . $3.00 Fixed administrative expense . . . . . . . . . . . $2.00 Sales commissions . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . $0.50 If the selling price is $22 per unit, what is the contribution margin per unit?

To calculate per unit contribution margin, items that need to be identified are selling price and per unit variable cost. Selling Price = $22 Variable Cost per Unit =$12.50 ----------- Contribution margin per unit is calculated by deducting per unit variable cost from selling price per unit. Contribution Margin per Unit = Selling Price − Variable Cost per Unit =$22 − $12.50 =$9.50 =$9.50

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $6.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50 Variable manufacturing overhead . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . $4.00 Fixed selling expense . . . . . . . . . . . . . . . . . . $3.00 Fixed administrative expense . . . . . . . . . . . $2.00 Sales commissions . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . $0.50 If 8,000 units are produced and sold, what is the variable cost per unit produced and sold?

To calculate the variable cost per unit, items that need to be identified are direct material per unit, direct labor per unit, variable manufacturing overhead per unit, sales commission, and variable administrative expense per unit Direct Material per Unit =$6 Direct Labor per Unit =$3.5 Variable Manufacturing Overhead per Unit =$1.5 Sales Commission =$1 Variable Administrative Expense per Unit =$0.5​ Variable cost per unit if 8,000 units are produced is calculated by adding direct material, direct labor, variable manufacturing overhead, sales commission, and variable administrative expenses. Variable Cost per unit​ = ​Direct Material + Direct Labor+ Variable Manufacturing Overhead + Sales Commissions+ Variable Administrative Expenses​ ​ --->>> =$6+$3.50+$1.50+$1+$0.50=$12.50​ $12.50

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $6.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50 Variable manufacturing overhead . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . $4.00 Fixed selling expense . . . . . . . . . . . . . . . . . . $3.00 Fixed administrative expense . . . . . . . . . . . $2.00 Sales commissions . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . $0.50 If 12,500 units are produced and sold, what is the variable cost per unit produced and sold?

To calculate the variable cost per unit, items that need to be identified are direct material per unit, direct labor per unit, variable manufacturing overhead per unit, sales commission, and variable administrative expense per unit. Direct Material per Unit=$6 Direct Labor per Unit=$3.50 Variable Manufacturing Overhead per Unit=$1.50 Sales Commission=$1 Variable Administrative Expense per Unit=$0.50 Variable cost per unit if 12,500 units are produced is calculated by adding direct material, direct labor, variable manufacturing overhead, sales commission, and variable administrative expenses. Variable Cost per Unit = (Direct Material + Direct labor + Variable Manufacturing Overhead + Sales Commission+ Variable Administrative Expenses) =$6+$3.50+$1.50+$1+$0.50=$12.50 =$12.50

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $6.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50 Variable manufacturing overhead . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . $4.00 Fixed selling expense . . . . . . . . . . . . . . . . . . $3.00 Fixed administrative expense . . . . . . . . . . . $2.00 Sales commissions . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . $0.50 If 12,500 units are produced, what is the average fixed manufacturing cost per unit produced?

To calculate total average fixed manufacturing cost, items that need to be identified are total fixed manufacturing cost and number of units. Total Fixed Manufacturing Cost =$40,000 Number of Units =12,500 Units Average manufacturing fixed cost per unit if 12,500 units are produced is calculated by dividing total fixed manufacturing cost by number of units produced. Average Fixed Cost = Total Fixed Manufacturing Cost /Number of Units Produced =$40,000 / 12,500 =$3.20 =$3.20

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $6.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50 Variable manufacturing overhead . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . $4.00 Fixed selling expense . . . . . . . . . . . . . . . . . . $3.00 Fixed administrative expense . . . . . . . . . . . $2.00 Sales commissions . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . $0.50 If 8,000 units are produced, what is the total amount of fixed manufacturing cost incurred to support this level of production?

To calculate total fixed manufacturing cost, items that need to be identified are per unit fixed manufacturing cost and number of units. Fixed Manufacturing Cost per Unit = $4 Total Number of Units = 10,000 Total fixed manufacturing cost if 8,000 units are produced is calculated by multiplying total fixed manufacturing cost and number of units produced. Total fixed cost remains the same irrespective of the units produced within the specified range of units produced. Total Fixed Manufacturing Cost = (Fixed Manufacturing Cost per Unit × Number of Units) =$4×10,000 = $40,000 = $40,000

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $6.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50 Variable manufacturing overhead . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . $4.00 Fixed selling expense . . . . . . . . . . . . . . . . . . $3.00 Fixed administrative expense . . . . . . . . . . . $2.00 Sales commissions . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . $0.50 If 12,500 units are produced, what is the total amount of fixed manufacturing cost incurred to support this level of production?

To calculate total fixed manufacturing cost, items that need to be identified are per unit fixed manufacturing cost and number of units. Fixed Manufacturing Cost per Unit =$4 Total Number of Units = 10,000 units Total fixed manufacturing cost if 8,000 units are produced is calculated by multiplying total fixed manufacturing cost and number of units produced. Total fixed cost remains the same irrespective of the units produced within the specified range of units produced. Total Fixed Manufacturing Cost = (Fixed Manufacturing Cost per Unit × Number of Units) =$4 × 10,000= $40,000 = $40,000

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $6.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50 Variable manufacturing overhead . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . $4.00 Fixed selling expense . . . . . . . . . . . . . . . . . . $3.00 Fixed administrative expense . . . . . . . . . . . $2.00 Sales commissions . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . $0.50 If 12,500 units are produced, what is the total amount of manufacturing overhead cost incurred to support this level of production? What is this total amount expressed on a per unit basis?

To calculate total manufacturing overhead, items that need to be identified are per unit fixed manufacturing cost, per unit variable manufacturing overhead, and total number of units. Fixed Manufacturing Cost per Unit = $4 Variable Manufacturing Overhead per Unit= $1.50 Total Number of Units = 10,000 units ----------- Total manufacturing overhead is calculated by adding fixed manufacturing overhead and variable manufacturing overhead. Variable manufacturing overhead is calculated by multiplying the per unit variable manufacturing overhead and number of units. Total Manufacturing Overhead = (Fixed Manufacturing Overhead + (Variable Manufacturing Overhead per Unit × Number of Units)) =$40,000+($1.50 × 12,500) =$58,750 --------------- Manufacturing overhead per unit is calculated by dividing the total manufacturing overhead by number of units. Per Unit Manufacturing Overhead = Total Manufacturing Overhead / Number of Units =$58,75012,500=$4.70 Per Unit Total Manufacturing Overhead Cost = $58,750 Manufacturing Overhead per Unit = $4.70

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $6.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50 Variable manufacturing overhead . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . $4.00 Fixed selling expense . . . . . . . . . . . . . . . . . . $3.00 Fixed administrative expense . . . . . . . . . . . $2.00 Sales commissions . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . $0.50 If 12,500 units are produced and sold, what is the total amount of variable costs related to the units produced and sold?

To calculate total variable cost, items that need to be identified are per unit variable cost and number of units. Variable Cost per Unit = $12.50 Number of Units = 12,500 Units Total variable cost is calculated by multiplying per unit variable cost and number of units. Variable Cost = Variable Cost per Unit × Number of Units =$12.5×12,500 units=$156,250 =$156,250

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $6.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50 Variable manufacturing overhead . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . $4.00 Fixed selling expense . . . . . . . . . . . . . . . . . . $3.00 Fixed administrative expense . . . . . . . . . . . $2.00 Sales commissions . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . $0.50 If 8,000 units are produced and sold, what is the total amount of variable costs related to the units produced and sold?

To calculate total variable cost, items that need to be identified are per unit variable cost and number of units. Variable Cost per Unit = $12.50 Number of Units = 8,000 units Total variable cost is calculated by multiplying per unit variable cost and number of units. Variable Cost = Variable Cost per Unit × Number of Units =$12.5×8,000 units=$100,000 =$100,000

Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . $7.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.00 Variable manufacturing overhead . . . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . . $5.00 Fixed selling expense . . . . . . . . . . . . . . . . . . . $3.50 Fixed administrative expense . . . . . . . . . . . . $2.50 Sales commissions . . . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . . $0.50 A). If 18,000 units are produced and sold, what is the total amount of variable cost related to the units produced and sold? B). If 22,000 units are produced and sold, what is the total amount of variable cost related to the units produced and sold?

To calculate total variable cost, items that need to be identified are variable cost per unit and units produced and sold. Variable Cost per Unit = $14.00 per unit Units Produced and Sold = 18,000 units Total variable cost is calculated by multiplying per unit variable cost and number of units produced and sold. Total Variable Cost = Variable Cost per Unit × Units Produced and Sold =$14.00 × 18,000 = $252,000 ---------------------- To calculate total variable cost, items that need to be identified are variable cost per unit and units produced and sold. Variable Cost per Unit = $14.00 per unit Units Produced and Sold = 22,000 units Total variable cost is calculated by multiplying per unit variable cost and number of units produced and sold. Total Variable Cost = Variable Cost per Uni t × Units Produced and Sold=$14.00 × 22,000 = $308,000

Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . $7.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.00 Variable manufacturing overhead . . . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . . $5.00 Fixed selling expense . . . . . . . . . . . . . . . . . . . $3.50 Fixed administrative expense . . . . . . . . . . . . $2.50 Sales commissions . . . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . . $0.50 A). If 18,000 units are produced and sold, what is the variable cost per unit produced and sold? B). If 22,000 units are produced and sold, what is the variable cost per unit produced and sold?

To calculate variable cost per unit, items that need to be identified are direct materials, direct labor, variable manufacturing overhead, sales commissions, and variable administrative expenses. Direct Materials=$7.00 Direct Labor=$4.00 Variable Manufacturing Overhead=$1.50 Sales Commissions=$1.00 Variable Administrative Expense=$0.50 Variable cost per unit is calculated by adding per unit direct material cost, direct labor cost, variable manufacturing overhead, sales commission, and variable administrative expense. Variable Cost per Unit = (Direct Material + Direct Labor + Variable Manufacturing Overhead + Sales Commissions + Variable Administrative Expense) =$7.00 + $4.00 + $1.50 + $1.00 + $0.50 =$14.00 per unit ---------------------------------- ^^ Same for both problems

Fixed Manufacturing Overhead per Unit​

Total Fixed Manufacturing Overhead​ / Units Produced

Total Direct Manufacturing Costs Formula​

Total Indirect Manufacturing Cost per Unit × Number of Units

Variable Manufacturing Overhead Cost per Unit Formula

Total Manufacturing Cost × Variable Percentage

Per Unit Manufacturing Overhead​ (cost)

Total Manufacturing Overhead​ / Number of Units

Total Traceable Manufacturing Cost

Total Traceable Manufacturing Costs per Unit × Number of Units

Total Fixed Manufacturing Cost​ Formula

Total fixed manufacturing cost is calculated by multiplying per unit fixed manufacturing overhead and number of units. Total Fixed Manufacturing Cost = (Fixed Manufacturing Overhead (cost) per Unit × Number of Units)

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $6.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50 Variable manufacturing overhead . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . $4.00 Fixed selling expense . . . . . . . . . . . . . . . . . . $3.00 Fixed administrative expense . . . . . . . . . . . $2.00 Sales commissions . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . $0.50 If 8,000 units are produced, what is the average fixed manufacturing cost per unit produced?

Total fixed manufacturing cost is calculated by multiplying per unit fixed manufacturing overhead and number of units. Total Fixed Manufacturing Cost = (Fixed Manufacturing Overhead per Unit × Number of Units) --->>> =$4 × 10,000 =$40,000 Average manufacturing fixed cost per unit if 8,000 units are produced is calculated by dividing total fixed manufacturing cost by number of units produced. Average Fixed Cost = Total Fixed Manufacturing Cost / Number of Units Produced =$40,000/ $8,000 =$5 =$5

Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . $7.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.00 Variable manufacturing overhead . . . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . . $5.00 Fixed selling expense . . . . . . . . . . . . . . . . . . . $3.50 Fixed administrative expense . . . . . . . . . . . . $2.50 Sales commissions . . . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . . $0.50 A). If 18,000 units are produced, what is the total amount of fixed manufacturing overhead incurred to support this level of production? B). If 22,000 units are produced, what is the total amount of fixed manufacturing overhead incurred to support this level of production?

Total fixed manufacturing overhead will remain the same as it is charged to the production in the relevant range and production of 18,000 units is within the range of production capacity. Fixed expenses remain constant within the relevant range of activity. $100,000 ---------------------- The relevant range for production is between 18,000 and 22,000. Therefore, fixed cost within the relevant range remains constant. Cost behavior of fixed costs remains valid only within the relevant range. $100,000

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $6.00 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50 Variable manufacturing overhead . . . . . . . $1.50 Fixed manufacturing overhead . . . . . . . . . . $4.00 Fixed selling expense . . . . . . . . . . . . . . . . . . $3.00 Fixed administrative expense . . . . . . . . . . . $2.00 Sales commissions . . . . . . . . . . . . . . . . . . . . $1.00 Variable administrative expense . . . . . . . . . $0.50 If 8,000 units are produced, what is the total amount of manufacturing overhead cost incurred to support this level of production? What is this total amount expressed on a per unit basis?

Total manufacturing overhead is calculated by adding fixed manufacturing overhead and variable manufacturing overhead. Variable manufacturing overhead is calculated by multiplying the per unit variable manufacturing overhead and number of units. Total Manufacturing Overhead = (Fixed Manufacturing Overhead + (Variable Manufacturing Overhead per Unit × Number of Units)) ---> = $40,000 + ($1.50×8,000) =$52,000 Manufacturing overhead per unit cost that would be allocated if 8,000 units are produced is calculated by dividing total manufacturing overhead to number of units. Per Unit Manufacturing Overhead = Total Manufacturing Overhead / Number of Units =$52,000 / 8,000 = $6.50 Per Unit Total Manufacturing Overhead Cost = $52,000 Manufacturing Overhead per Unit = $6.50

Harris Company manufactures and sells a single product. A partially completed schedule of the company's total costs and costs per unit over the relevant range of 30,000 to 50,000 units is given below: Units Produced and Sold 30,000 40,000 50,000 Total costs: Variable cost . . . . . . . . . . $180,000 ? ? Fixed cost . . . . . . . . . . . . 300,000 ? ? Total cost . . . . . . . . . . . . . . $480,000 ? ? Costs per unit: Variable cost . . . . . . . . . . ? ? ? Fixed cost . . . . . . . . . . . . ? ? ? Total cost per unit . . . . . . . ? ? ? Complete the above schedule of the company's total costs and costs per unit

Total variable cost is directly proportional to the level of production, and thus, with a change in the level units of production, total variable expenses will also change. Total fixed cost remains constant irrespective of any change in the level of production. Total cost is the sum of variable and fixed cost. Step 1: Variable cost per unit is calculated by dividing total variable cost by number of units. Variable Cost per Unit = Total Variable Cost / Number of Units =$180,000 / 30,000 =$6 per Step 2: Variable cost for 40,000 and 50,000 units is calculated by multiplying per unit variable cost and number of units. Variable Cost for 40,000= 6 × 40,000 = $240,000 for 50,000= $6 × 50,000 = $300,000 Step 3: Fixed cost per unit for 30,000, 40,000, and 50,000 units is calculated by dividing the total fixed cost by number of units. Fixed Cost = Total Fixed Cost / Number of Units for 30,000 Units= $300,000 / 30,000 = $10 for 40,000 Units= $300,000 / 40,000 =$7.50 for 50,000 Units =$300,000 / 50,000 = $6Fixed Step 4: Total cost for 40,000 and 50,000 units is calculated by adding variable cost and fixed cost. Total Cost= Variable Cost + Fixed Cost for 40,000 Units = $240,000 + $300,000 =$540,000 for 50,000 Units =$300,000 + $300,000 = $600,000 Step 5: Total cost per unit for 30,000,40,000 and 50,000 units is calculated by adding per unit variable cost and fixed cost. Total Cost per Unit= Total Variable Cost per Unit + Total Fixed Cost per Unit for 30,000 Units = $6 + $10 =$ 16 for 40,000 Units =$6 + $7.5 = $13.50 for 50,000 Units = $6 + $6 =$12

What is the difference between a traditional format income statement and a contribution format income statement?

Traditional income statement works by separating product costs from period costs, whereas in a contribution income statement, variable selling and administrative periods costs are grouped with variable product costs to arrive at the contribution margin. A traditional income statement uses absorption or full costing, where both variable and fixed manufacturing costs are included when calculating the cost of goods sold. The contribution margin income statement, in contrast, uses variable costing, which means fixed manufacturing costs are assigned to overhead costs and therefore not included in product costs. Traditional income statement is generally used for external reporting purposes. Contribution income statements are presented to management officers and stakeholders in decision making by analyzing the results of a single product or product categories. Traditional income statements serve the purpose of showing profitability only of the company, whereas contribution income statements can offer additional insight as how that net profit or loss comes to be.

Harris Company manufactures and sells a single product. A partially completed schedule of the company's total costs and costs per unit over the relevant range of 30,000 to 50,000 units is given below: Units Produced and Sold 30,000 40,000 50,000 Total costs: Variable cost . . . . . . . . . . $180,000 ? ? Fixed cost . . . . . . . . . . . . 300,000 ? ? Total cost . . . . . . . . . . . . . . $480,000 ? ? Costs per unit: Variable cost . . . . . . . . . . ? ? ? Fixed cost . . . . . . . . . . . . ? ? ? Total cost per unit . . . . . . . ? ? ? Assume that the company produces and sells 45,000 units during the year at a selling price of $16 per unit. Prepare a contribution format income statement for the year.

Under the contribution margin income statement, the variable and fixed expenses are bifurcated and presented separately. Contribution margin is the difference between the sales and the variable expenses. Net operating income will be calculated by deducting the fixed expenses from the contribution margin. Step 1: Sales is calculated by multiplying per unit selling price of $16 by the number of units sold. Sales = Number of Units Sold × Sales Price per Unit =45,000 units × $16 = $720,000 Step 2: Variable expenses are calculated by multiplying per unit variable expense of $6 by the number of units . Variable Expenses =Variable Expenses per Unit × Number of Units Sold =45,000 units × $6 = $270,000 Step 3: Sales: $720,000 Variable Expenses: $270,000 Contribution Margin: $450,000 Fixed Expenses: $300,000 NOI: $150,000

Total Fixed Manufacturing Overhead Formula

Units Produced × Fixed Manufacturing Overhead per Unit​

Total Product Cost Formula

Units Produced × Product Cost per Unit

Total Period Costs

Units Sold × Period Cost per Unit

Total Variable Cost​ Formula

Variable Cost per Unit × Units Produced and Sold

Manufacturing Overhead per Unit Formula

Variable Manufacturing Overhead +Fixed Manufacturing Overhead ​

Total Indirect Manufacturing Cost per Unit​ Formula

Variable Manufacturing Overhead + Fixed Manufacturing Overhead

Define the following terms: 1. differential cost 2. sunk cost 3. opportunity cost

a). differential cost: Differential cost is also known as incremental cost. This cost is identified when there is more than one alternative for doing a task. b). sunk cost: Sunk cost is irrelevant for taking any decisions because it cannot be recovered that is, once incurred, it cannot be changed. c). opportunity cost: Opportunity cost is also referred to as alternative cost. It is the cost of foregoing the next best alternative by selecting another alternative.

What effect does an increase in the activity level have on— a. Average fixed costs per unit? b. Variable costs per unit? c. Total fixed costs? d. Total variable costs?

a. Average fixed costs per unit?: Unit fixed costs decreases as the level of activity increases as the same amount gets distributed over a larger amount of units. Suppose Fixed cost REnt = $ 1000 and the units produced are 50 so, Unit fixed costs = 1000 / 50 = $ 20 but if the units produced increases to 100 , then Unit fixed costs = 1000 / 100 = $ 10 ; so we can find that unit fixed costs decreased as the level of activity increased. b. Variable costs per unit?: Unit variable costs remain constant irrespective of the increase or decrease in the level of activity . Suppose, we require $ 4 of Direct material per unit produced , so it will be same either 50 units are produced, 100 units are produced or 200 units are produced. c. Total fixed costs?: Total fixed costs remain constant irrespective of the increase or decrease in the level of activity . Suppose, Rent of the Factory is $ 300 per month , so the person has to pay $ 300 per month irrespective of the fact whether he produces 50 units or 100 units or don't produce anything. d. Total variable costs?: Total variable costs increases as the level of activity increases as the unit variable costs start getting multiplied with larger no. of units. Taking the previous example, if $ 4 of Direct material per unit is required and we produce 50 units , then total variable costs = 4 * 50 = $ 200 and if we produce 100 units , then total variable costs = 4 * 100 = $ 400 ; so we can find that total variable costs increased as the level of activity increased.