Chapter 1, Problem 1PSA

To determine

Fixed Cost:

Fixed cost is that costs which will be incurred whether the product is produced or not. Fixed cost does not vary with increase or decrease in volume of the production, but fixed cost per unit varies. Examples of the fixed cost are depreciation on machinery, insurance premium and rent.

Variable Cost:

Variable cost is that cost which is fixed for per unit. Variable cost increases with the increase in the number of units produced.

Product Cost:

Product cost is the cost which is incurred to produce the product. This type of cost is direct cost. Direct material, direct labor and factory overheads are examples of the product cost.

Period Costs:

Period costs are not related to the manufacturing of the product. These costs are related to administration and selling. Depreciation on the office equipment, sales commission, office manager salary and interest expenses are examples of the period cost.

1.

To identify:Nature of cost.

Explanation of Solution

1.

(a)

The cost is the variable costs.

Variable cost remains per unit fixed. It increases with respect to the increase in the units of the production. Here, cost of the plastic will increase with respect to increase in the number of the units. So, it is the variable cost.

(b)

The cost is the product cost.

Plastic for casing is related to the direct material and it related to the manufacturing the product. So, that is why it is related to the product cost.

2.

(a)

The cost is the variable costs.

Variable cost remains per unit fixed. It increases with respect to the increase in the units of the product. Here, cost of the wages of the assembly increases with respect to the increase in the number of the units. So, it is the variable cost.

(b)

The cost is the product cost.

Product cost is that cost which is directly related to the manufacturing the product. Here, wages of assembly worker is related to the manufacturing of the product. So, it will be product cost.

3.

(a)

The cost is the fixed cost.

Fixed cast is that cost which varies per unites from increase or decrease of the no of the unites. Here property tax is fixed cost because it varies with increase or decrease of no of the units of the product.

(b)

The cost is the period cost.

Period cost is the cost which is not related to the manufacturing of the product. Property tax is not related to the manufacturing of the product. It is related to the administration. So, it is the period cost.

4.

(a)

Fixed cast is that cost which varies per unites from increase or decrease of the no of the unity. Here, accounting staff salary is fixed cost because it varies with increase or decrease of no of the units of the product.

(b)

The cost is the period cost.

Period cost is the cost which is not related to the manufacturing of the product. Accounting staff salary is not related to the manufacturing of the product. It is related to the administration. So, it is the period cost.

5.

(a)

$26,000 is the variable cost.

Variable cost remains per unit fixed. It increases with respect to the increase in the units of the product. Here, cost of the Drum stand increases with respect to the increase in the number of the units. So, Drum stand is the variable cost.

(b)

$26,000 is the product cost.

Product cost is that cost which is directly related to the manufacturing the product. Drum stand are related to the purchase and manufacturing of the product. So, drum stand is product cost.

6.

(a)

$10,000 is the fixed cost.

Fixed cast is that cost which varies per unites from increase or decrease of the no of the unity. Here, Rent cost of the equipment of the sales staff is fixed cost because it varies with increase or decrease of no of the units of the product.

(b)

$10,000 is the period cost.

Period cost is the cost which is not related to the manufacturing of the product. Rent cost of equipment for sales staff is not related to the manufacturing of the product. It is related to the administration. So, it is the period cost

7.

(a)

$125,000 is fixed cost.

Fixed cast is that cost which varies per unites from increase or decrease of the no of the unity. Here, Upper management salaries are fixed cost because it varies with increase or decrease of no of the units of the product.

(b)

$125,000 is period cost.

Period cost is the cost which is not related to the manufacturing of the product. Upper management salary is not related to the manufacturing of the product. It is related to the administration. So, it is the period cost

8.

(a)

$10,000 is the fixed cost.

Fixed cast is that cost which varies per unites from increase or decrease of the no of the unity. Here, Annual flat fee for factory maintenance service are fixed cost because it varies with increase or decrease of no of the units of the production.

(b)

$10,000 is the period cost.

Period cost is the cost which is not related to the manufacturing of the product. Annual flat fee for factory maintenance service is not related to the manufacturing of the product. It is related to the administration. So, it is the period cost

9.

(a)

$15,000 is the variable cost.

Variable cost remains per unit fixed. It increases with respect to the increase in the units of the product. Here, cost of sales commission increases with respect to the increase in the number of the units. So, sales commission is the variable cost.

(b)

$15,000 is the period cost.

Period cost is the cost which is not related to the manufacturing of the product. Sales commission is not related to the manufacturing of the product. It is related to the administration and selling. So, it is the period cost

10.

(a)

$40,000 is the fixed cost.

Fixed cast is that cost which varies per unites from increase or decrease of the no of the unity. Here, Machinery depreciation (straight line) is fixed cost because per unity cost varies with increase or decrease of no of the units of the production.

(b)

$40,000 is the period cost.

Machinery deprecation incurs once in the year and it is not related to the manufacturing of the production. So, it is the period cost.

2.

To determine

To compute: Manufacturing cost per drum set.

Explanation of Solution

Computation of the manufacturing cost per drum set,

Particulars	Amounts ($)	Amounts ($)
Variable costs:
Plastic for casting	17,000
Wages for assembly workers	82,000
Drum stands(1,000 stands purchased)	26,000
Total variable costs		125,000
Fixed cost:
Property taxes on factory	5,000
Annual flat fee factory maintenance service	10,000
Machinery deprecation, straight line method	40,000
Total fixed cost		55,000
Total manufacturing cost (A)		180,000
Number of drum sets (B)		1,000
Manufacturing cost per drum set $\frac{\left(\text{A}\right)}{\left(\text{C}\right)}$		180
Table (1)

Hence, manufacturing cost per drum set is $180 per unit.

3.

To determine

To compute: Total cost of plastic and per unit cost of plastic.

Explanation of Solution

Given,
Cost of plastic for casing for 1,000 drum sets is $17,000.

Formula to calculate per unit cost of the drum sets,

$\left(\begin{array}{l}\text{Per}\text{unit}\text{cost}\text{of}\text{the}\\ \text{plastic}\text{for}\text{the}\text{casing}\end{array}\right)=\left(\frac{\text{Total}\text{cost}\text{of}\text{the}\text{plastic}\text{for}\text{casing}}{\text{Number}\text{of}\text{drum}\text{sets}}\right)$

Substitute, $17,000 for total cost for plastic for casting and 1,000 units for number of drum sets.

$$ $\begin{array}{c}\text{Per}\text{unit}\text{cost}\text{of}\text{theplastic}\text{for}\text{the}\text{casing}=\frac{\$17,000}{1,000\text{units}}\\ =\$17\end{array}$

Formula to calculate total cost of plastic for the casing,

$\left(\begin{array}{l}\text{Total}\text{cost}\text{of}\text{plastic}\\ \text{for}\text{the}\text{casing}\end{array}\right)=\left(\begin{array}{l}\text{Per}\text{unit}\text{cost}\text{ofplastic}\text{for}\text{casing}\\ \times \text{Number}\text{of}\text{drum}\text{sets}\end{array}\right)$

Substitute $17 for per unit cost for plastic for casting and 1,200 unit for number of drum sets.

$\begin{array}{c}\text{Total}\text{cost}\text{of}\text{plastic}\text{for}\text{the}\text{casing}=\$17\times 1,200\text{units}\\ =\$20,400\end{array}$

Hence, total cost of plastic for casing will be $20,400.