Chapter 3 Solutions
3-21 (a)
(b)
(c)
(d)
(e)
(f)
Manufacturing
Selling
Distribution
General and administrative
Manufacturing
Research and development
(g)
(h)
(i)
(j)
(k)
(l)
Marketing
General and administrative
Manufacturing
General and administrative
After-sales
Selling
3-22 (a)
(b)
(c)
(d)
(e)
(f)
Indirect
Direct
Direct
Indirect
Direct
Indirect*
(g)
(h)
(i)
(j)
(k)
(l)
Indirect
Indirect
Direct
Indirect
Direct
Indirect
* This overtime premium is not paid for every unit of output. It is paid only for
those units that are produced beyond the regular working hours. Even
though it is paid to workers working with their hands in the production
process, conventionally, this is treated as manufacturing support cost and
not as direct labor cost.
3-23 (a)
(b)
(c)
(d)
(e)
(f)
Unit-related
Batch-related
Product-sustaining
Business-sustaining
Unit-related
Batch-related
(g)
(h)
(i)
(j)
(k)
(l)
Product-sustaining
Business-sustaining
Unit- or batch-related
Unit -or batch-related
Business-sustaining
Product-sustaining
3-28
Cost of fabric used in dresses
Total direct material cost
Wages of dressmakers
Wages of dress designers
Total Direct labor cost
Wages of employee who
repairs the shop's pattern
machines
Cost of electricity used in the
pattern department
Depreciation on pattern
machines and sewing
machines
Cost of insurance for the
production employees
Rent for the building*
Total manufacturing support
cost
Wages of sales personnel
Rent for the building**
Total selling costs
Cost of new sign in front of
retail shop
Cost of advertisements
Cost of hiring a plane and a
pilot
Total marketing costs
Wages of designers who
experiment
Total R&D costs
Salary of the owner's
secretary
Rent for the building***
Total general and
administrative costs
Total costs:
Cost classification
Direct material cost $60,000
$60,000
Direct labor cost
Direct labor cost
$5,000
$4,000
$9,000
Manufacturing
support
$2,000
Manufacturing
support
Manufacturing
support
200
Manufacturing
support
Manufacturing
support
10,000
2,000
3,000
$17,200
Selling costs
Selling costs
$ 1,000
1,500
$2,500
Marketing costs
$ 400
Marketing costs
Marketing costs
800
1,400
$2,600
R&D costs
$3,000
General &
Administrative
costs
General &
Administrative
costs
$1,200
$3,000
1,500
$2,700
$97,000
* Since, only one floor (out of the two available floors) is used for manufacturing, consider
1/2 of $6000 (i.e. $3,000) as rent for housing production related activities.
** Since, one half of the first floor is used (which amounts to 1/4 of the building), take
1/4($6,000) = $1,500 as selling cost
*** Using the same logic as above, since 1/4 of the building is used for administration,
administration portion of the rent is $1,500
b)
Unit related costs
Cost of fabric + Wages of dress makers + wages of dress designers =
$60,000+5000+4000= $ 69,000
(Since the design is custom (according to the data in the problem), I am
treating it as unit related activity)
Batch related costs
Wages of sales personnel = $1,000
Product sustaining costs
Cost of electricity in pattern dept. + wages of designers experimenting with new
designs = $200+$3000 = $3,200
Business sustaining costs include all other costs not listed above = $ 23,800
Problems outside the textbook
1. Understanding manufacturing and selling costs
Osborne Company’s monthly budget includes fixed manufacturing overhead costs
of $72,000 and fixed selling costs of $48,000. Management expects that each
month the company will produce and sell 12,000 calculators, the firm’s only product.
Estimated unit costs are as follows:
Cost Item
Direct materials
Direct labor
Variable manufacturing support
Fixed manufacturing support
Variable selling
Fixed selling
Unit Cost
$32
20
15
6
3
4
Compute the following amounts:
1. Estimated conversion cost per unit.
2. Estimated prime cost per unit.
3. Estimated variable cost per unit.
4. Estimated total cost of operations when the firm plans to produce 12,000 units
and sell 12,000 units.
1. Conversion cost per unit = direct labor + total manufacturing overhead per unit
=
$20
+
$15
+
$6
=
$41 per unit
=
$52 per unit
2. Prime cost per unit = direct material + direct labor
=
$32
+
$20
3. Total variable cost per unit = direct material + direct labor + variable manufacturing support +
variable selling cost
=
4.
$32
+
$20
+
$15
+
$3
=
$70 per unit
Total cost for 12,000 units of production and 12,000 units of sales are determined as follows:
Direct Material (12,000 units × $32)
Direct Labor
(12,000 units × $20)
$384,000
240,000
Manufacturing Support:
Variable
(12,000 units × $15)
Fixed
180,000
72,000
Selling costs:
Variable
Fixed
Total
(12,000 units × $3)
36,000
48,000
$960,000
2. Learning to estimate future support costs:
XYZ Company has estimated the following relationship between its manufacturing
support cost and the drivers influencing the support cost.
Support cost = $100 (number of setups) + $2,000 (number of products) + $15
(number of direct labor hours) + $ 25(number of machine hours).
The expected activity levels for the months of September and October follow:
September
October
Number of
setups
Number of
products
100
140
3
4
Number of
direct labor
hours
2000
3000
Number of
machine hours
4000
5500
Estimate the manufacturing support cost for September and October:
Estimated cost for September = $100 (100) + $2,000 (3) + $15 (2000) + $25 (4000)
= $10,000 + $6,000 + $ 30,000 + $ 100,000
= $ 146,000
Estimated cost for October = $ 100 (140) + $2,000 (4) + $15 (3,000) + $25 (5,500)
= $ 14,000 + $8,000 + $ 45,000 + $ 137,500
= $ 204,500