Classification Account Amount Direct materials All variable $300,000 Direct manufacturing labor All variable 225,000 Power All variable 37,500 Supervision labor Materials-handling labor 20% variable 56,250 50% variable 60,000 Maintenance labor 40% variable 75,000 Depreciation Rent, property taxes, and administration 0% variable 95,000 0% variable 100,000 Prepare a schedule of variable, fixed, and total manufacturing costs for each account category in 2018. Estimate total manufacturing costs for 2018. Calculate Gower's total manufacturing cost per unit in 2017, and estimate total manufacturing cost per unit in 2018. Required 1. 2. How can you obtain better estimates of fixed and variable costs? Why would these better estimates be useful to Gower? 3.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Account analysis method. Gower, Inc., a manufacturer of plastic products, reports the following
Gower, Inc., produced 75,000 units of product in 2017. Gower’s management is estimating costs for 2018 on the basis of 2017 numbers. The following additional information is available for 2018.
- Direct materials prices in 2018 are expected to increase by 5% compared with 2017.
- Under the terms of the labor contract, direct manufacturing labor wage rates are expected to increase by 10% in 2018 compared with 2017.
- Power rates and wage rates for supervision, materials handling, and maintenance are not expected to change from 2017 to 2018.
Depreciation costs are expected to increase by 5%, and rent, property taxes, and administration costs are expected to increase by 7%.- Gower expects to manufacture and sell 80,000 units in 2018.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
