Chapter 1, Problem 22P

Cost Terminology; Contribution Format Income Statement
Miller Company’s total sales are $120,000. The company’s direct laborcost is $15,000, which represents 30% of its total conversion cost and 40% of its total prime cost. Its total selling and administrative expense is $18,000 and its only variable selling and administrative expense is a sales commission of 5% of sales. The company maintains no beginning or ending inventories and its manufacturing overhead costs are entirely fixed costs.
Required:
1.What is the total manufacturing overhead cost?
2. What is the total direct materials cost?
3. What is the total manufacturing cost?
4. What is the total variable selling and administrative cost?
5. What is the total variable cost?
6. What is the total fixed cost?
7. What is the total contribution margin?

To determine

Introduction: Overhead cost includes the cost of indirect material, labor and other expenses. Overhead cost is not related to cost of production this is the reason it specify as indirect cost. The example of overhead cost is administration cost, selling and distribution cost and other.

To compute: The total manufacturing overhead cost.

Answer to Problem 22P

Solution: The total manufacturing overhead is $35,000.

Explanation of Solution

Given,

Direct labor cost is $15,000

Direct labor cost is 30% of conversion cost

Conversion cost is $50,000

Formula to calculate the manufacturing overhead is,

$\text{Manufacturing overhead}=\text{Conversion cost}-\text{Direct labor cost}$

Substitute $50,000 for conversion cost and $15,000 for direct labor cost in the above formula,

$\begin{array}{c}\text{Manufacturing overhead}=\$50,000-\$15,000\\ =\$35,000\end{array}$

Working Notes:

Calculate conversion cost,

$\begin{array}{c}\text{Conversion cost}=\frac{\text{Direct labor cost}}{30\%}\\ =\frac{\$15,000}{30}\times 100\\ =\$50,000\end{array}$

Conclusion

Thus, total manufacturing overhead is $35,000.

To determine

Introduction: Direct cost is the cost that is attributed to particular product. Direct cost is also known as identifiable cost that cost is easily identifiable, for example company spend money to purchase raw material for production of product then the cost of purchasing raw material is direct cost.

To compute: The total direct material cost.

Answer to Problem 22P

Solution: The total direct material cost is $22,500.

Explanation of Solution

Given,

Direct labor cost is $15,000

Direct labor cost is 40% of prime cost

Prime cost is $37,500

Formula to calculate the direct material cost is,

$\text{Direct material cost}=\text{Primecost}-\text{Direct labor cost}$

Substitute $37,500 for prime cost and $15,000 for direct labor cost in the above formula,

$\begin{array}{c}\text{Direct material cost}=\$37,500-\$15,000\\ =\$22,500\end{array}$

Working Notes:

Calculate prime cost,

$\begin{array}{c}\text{Prime cost}=\frac{\text{Direct labor cost}}{40\%}\\ =\frac{\$15,000}{40}\times 100\\ =\$37,500\end{array}$

Conclusion

Thus, the total direct material cost is $22,500.

To determine

Introduction: Direct cost is the cost that is attributed to particular product. Direct cost is also known as identifiable cost that cost is easily identifiable, for example company spend money to purchase raw material for production of product then the cost of purchasing raw material is direct cost.

To compute: The total manufacturing cost.

Answer to Problem 22P

Solution: The total manufacturing cost is $72,500.

Explanation of Solution

Given,

Direct labor cost is $15,000

Manufacturing overhead is $35,000 (calculated in 95484-1-22P1)

Direct material is $22,500 (calculated in 95484-1-22P2)

Formula to calculate total manufacturing cost is,

$\text{Manufacturing cost}=\left[\begin{array}{l}\text{Direct material cost}+\text{Direct labor cost}+\\ \text{Manufacturing overhead}\end{array}\right]$

Substitute $22,500 for direct material cost, $15,000 for direct labor cost and $35,000 for manufacturing overhead in the above formula,

$\begin{array}{c}\text{Manufacturing cost}=\$22,500+\$15,000+\$35,000\\ =\$72,500\end{array}$

Conclusion

Thus, the total manufacturing cost is $72,500.

To determine

Introduction: Indirect cost includes the cost of indirect material, labor and other expenses. Indirect cost is not related to cost of production this is the reason it specify as overhead cost. The example of indirect cost is administration cost, selling and distribution cost and other.

To compute: The total variable selling and administrative cost.

Answer to Problem 22P

Solution: The total variable selling and administrative cost is $6,000.

Explanation of Solution

Given,

Sales is $120,000

Variable selling and administrative expenses are 5% of sales

Formula to calculate the variable selling and administrative cost is,

$\text{Variable selling and administrative cost}=\text{Sales}\times \text{5\%}$

Substitute $120,000 for sales in the above formula,

$\begin{array}{c}\text{Variable selling and administrative cost}=\$120,000\times \text{5\%}\\ \text{=\$6,000}\end{array}$

Conclusion

Thus, the total variable selling and administrative cost is $6,000.

To determine

Introduction: The cost of production that is flexible based on the level of production is called variable cost. It is included to report the total cost of production.

To compute: The total variable cost.

Answer to Problem 22P

Solution: The total variable cost is $43,500.

Explanation of Solution

Given,

Direct labor cost is $15,000

Direct material cost is $22,500 (calculated in 95484-1-22P2)

Variable selling and administrative cost is $6,000 (calculated in 95484-1-22P4)

Formula to calculate the total variable cost is,

$\text{Total variable cost}=\left[\begin{array}{l}\text{Direct material cost}+\text{Directlabor cost}+\\ \text{Selling and administrative cost}\end{array}\right]$

Substitute $22,500 for direct material cost, $15,000 for direct labor coat and $6,000 for selling and administrative cost in the above formula,

$\begin{array}{c}\text{Total variable cost}=\$22,500+\$15,000+\$6,000\\ =\$43,500\end{array}$

Conclusion

Thus, the total variable cost is $43,500.

To determine

Introduction: Fixed costs are the cost that does not change with the change in production. The company has to bear fixed cost whether production occurs or not. Rent, electricity is some of the example of fixed cost.

To compute: The total fixed cost.

Answer to Problem 22P

Solution: The total fixed cost is $47,000.

Explanation of Solution

Given,

Manufacturing overhead is $35,000 (calculated in 95484-1-22P1)

Variable Selling and administrative cost is $6,000 (calculated in 95484-1-22P4)

Total selling and administration cost is $18,000

Fixed selling and administrative expense is $12,000 (working notes)

Formula to calculate the total fixed cost is,

$\text{Total fixed cost}=\left[\begin{array}{l}\text{Manufacturing overhead cost}+\\ \text{Fixed selling and administrative expense}\end{array}\right]$

Substitute $35,000 for manufacturing overhead and $12,000 for fixed selling and administrative cost in the above formula,

$\begin{array}{c}\text{Total fixed cost}=\$35,000+\$12,000\\ =\$47,000\end{array}$

Working Notes:

Calculate the fixed selling and administrative expense,

$\begin{array}{c}\text{Fixed selling and administrative cost}=\left[\begin{array}{l}\text{Total selling and administrative cost}-\\ \text{Variable selling and administrative cost}\end{array}\right]\\ =\$18,000-\$6,000\\ =\$12,000\end{array}$

Conclusion

Thus, the total fixed cost is $47,000.

To determine

Introduction: Income Statement includes the information of net income earn or net loss suffered by the company. The expenses deducting from revenue and the resultant is net income or loss to the company. This is informative report that helps the user of financial information to take decision.

To compute: The total contribution margin.

Answer to Problem 22P

Solution: The total contribution margin is $76,500.

Explanation of Solution

Given,

Sales is $120,000

Total variable cost is $43,500 (95484-1-22P5)

Formula to calculate the total contribution margin is,

$\text{Total contribution margin}=\text{Sales}-\text{Total variable cost}$

Substitute $120,000 for sales and $43,500 for variable cost in the above formula,

$\begin{array}{c}\text{Total contribution margin}=\$120,000-\$43,500\\ =\$76,500\end{array}$

Conclusion

Thus, the total contribution margin is $76,500.