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Chapter 2 Homework - Manufacturing Economics And

Computation Exercise With Solution
Managerial Cost Accounting (Eastern Michigan University)

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2-21 Computing and interpreting manufacturing unit costs. Minnesota Office Products (MOP) produces
three different paper products at its Vaasa lumber plant: Supreme, Deluxe, and Regular. Each product has its
own dedicated production line at the plant. It currently uses the following three-part classification for its
manufacturing costs: direct materials, direct manufacturing labor, and manufacturing overhead costs. Total
manufacturing overhead costs of the plant in July 2017 are $150 million ($15 million of which are fixed). This
total amount is allocated to each product line on the basis of the direct manufacturing labor costs of each line.
Summary data (in millions) for July 2017 are as follows:
Supreme Deluxe Regular
Direct material costs $ 89 $ 57 $ 60
Direct manufacturing labor costs $ 16 $ 26 $  8
Manufacturing overhead costs $ 48 $ 78 $ 24
Units produced   125   150   140
Required:
1. Compute the manufacturing cost per unit for each product produced in July 2017.
2. Suppose that, in August 2017, production was 150 million units of Supreme, 190 million units of Deluxe,
and 220 million units of Regular. Why might the July 2017 information on manufacturing cost per unit be
misleading when predicting total manufacturing costs in August 2017?

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SOLUTION 2-21
(15 min.) Computing and interpreting manufacturing unit costs.

1. (in millions)
Supreme Deluxe Regular Total
Direct material cost $ 89.00 $ 57.00 $60.00 $206.00
Direct manuf. labor costs 16.00 26.00 8.00 50.00
Manufacturing overhead costs 48.00 78.00 24.00 150.00
Total manuf. costs 153.00 161.00 92.00 406.00
Fixed costs allocated at a rate
of $15M $50M (direct mfg.
labor) equal to $0.30 per
dir. manuf. labor dollar
(0.30  $16; 26; 8) 4.80 7.80 2.40 15.00
Variable costs $148.20 $153.20 $89.60 $391.00
Units produced (millions) 125 150 140
Manuf. cost per unit (Total manuf.
costs ÷ units produced) $1.2240 $1.0733 $0.6571
Variable manuf. cost per unit
(Variable manuf. costs
Units produced) $1.1856 $1.0213 $0.6400

(in millions)
Supreme Deluxe Regular Total
2. Based on total manuf. cost
per unit ($1.2240  150;
$1.0733  190; $0.6571 220) $183.60 $203.93 $144.56 $532.09
Correct total manuf. costs based
on variable manuf. costs plus
fixed costs equal
Variable costs ($1.1856  150; $177.84 $194.05 $140.80 $512.69
$1.0213  190; $0.64  220)
Fixed costs 15.00
Total costs $527.69

The total manufacturing cost per unit in requirement 1 includes $15 million of indirect manufacturing costs that
are fixed irrespective of changes in the volume of output per month, while the remaining variable indirect
manufacturing costs change with the production volume. Given the unit volume changes for August 2017, the
use of total manufacturing cost per unit from the past month at a different unit volume level (both in aggregate
and at the individual product level) will overestimate total costs of $532.09 million in August 2017 relative to
the correct total manufacturing costs of $527.69 million calculated using variable manufacturing cost per unit
times units produced plus the fixed costs of $15 million.

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2-27 Variable and Fixed Costs. Consolidated Motors specializes in producing one specialty vehicle. It is
called Surfer and is styled to easily fit multiple surfboards in its back area and top-mounted storage racks.
Consolidated has the following manufacturing costs:
Plant management costs, $1,992,000 per year
Cost of leasing equipment, $1,932,000 per year
Workers’ wages, $800 per Surfer vehicle produced
Direct materials costs: Steel, $1,400 per Surfer; Tires, $150 per tire, each Surfer takes 5 tires (one spare).
City license, which is charged monthly based on the number of tires used in production:
0–500 tires $ 40,040
501–1,000 tires $ 65,000
more than 1,000 tires $249,870

Consolidated currently produces 170 vehicles per month.

Required:
1. What is the variable manufacturing cost per vehicle? What is the fixed manufacturing cost per month?
2. Plot a graph for the variable manufacturing costs and a second for the fixed manufacturing costs per month.
How does the concept of relevant range relate to your graphs? Explain.
3. What is the total manufacturing cost of each vehicle if 80 vehicles are produced each month? 205 vehicles?
How do you explain the difference in the manufacturing cost per unit?

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SOLUTION 2-27
(15–20 min.) Variable costs and fixed costs.

1. Variable manufacturing cost per vehicle

Steel $1,400 per Surfer
Tires 750 per Surfer
Direct manufacturing labor 800 per Surfer
Total $2,950 per Surfer

Fixed manufacturing costs per month

Plant management costs ($1,992,000 ÷ 12) $ 166,000
Cost of leasing equipment ($1,932,000 ÷ 12) 161,000
City license (for 170 surfers or 850 tires) 65,000
Total fixed manufacturing costs $392,000

Fixed costs per month (1 surfer takes 5 tires)

0 to 100 surfers per month = $166,000 + $161,000 + $40,040 = $367,040
101 to 200 surfers per month = $166,000 + $161,000 + $65,000 = $392,000
More than 200 surfers per month = $166,000 + $161,000 + $249,870 = $576,870
2.

$600,000
$900,000
Total Variable Costs

Total Fixed Costs

$500,000
$400,000
$600,000
$300,000

$300,000 $200,000
$100,000

100 200 300 100 200 300

Surfers per Month Surfers per Month

The concept of relevant range is potentially relevant for both graphs. However, the question does not place
restrictions on the unit variable costs. The relevant range for the total fixed costs is from 0 to 100 surfers; 101 to
200 surfers; more than 200 surfers. Within these ranges, the total fixed costs do not change in total.

3.
Vehicles Tires Unit Variable Unit Total
Produced Produced Fixed Cost Unit Fixed Cost per Cost per
per Month per Month per Month Cost per Vehicle Vehicle Vehicle
(1) (2) = (1) × 5 (3) (4) = FC ÷ (1) (5) (6) = (4) + (5)
(a) 80 400 $367,040 $367,040 ÷ 80 = $4,588 $2,950 $7,538
(b) 205 1,025 $576,870 $576,870 ÷ 205 = $2,814 $2,950 $5,764

The unit cost for 80 vehicles produced per month is $7,538, while for 205 vehicles it is only $5,764. This
difference is caused by the fixed cost increment of $209,830 (an increase of 50%, $209,830 ÷ $367,040 = 57%)
being spread over an increment of 125 (205 – 80) vehicles (an increase of 156%, 125 ÷ 80). The fixed cost per
unit is therefore lower.

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2-28 Variable costs, fixed costs, relevant range. Gummy Land Candies manufactures jaw-breaker candies in
a fully automated process. The machine that produces candies was purchased recently and can make 5,000 per
month. The machine costs $6,500 and is depreciated using straight-line depreciation over 10 years assuming
zero residual value. Rent for the factory space and warehouse and other fixed manufacturing overhead costs
total $1,200 per month.
Gummy Land currently makes and sells 3,900 jaw-breakers per month. Gummy Land buys just enough
materials each month to make the jaw-breakers it needs to sell. Materials cost 40¢ per jaw-breaker.
Next year Gummy Land expects demand to increase by 100%. At this volume of materials purchased, it will
get a 10% discount on price. Rent and other fixed manufacturing overhead costs will remain the same.

Required:
1. What is Gummy Land’s current annual relevant range of output?
2. What is Gummy Land’s current annual fixed manufacturing cost within the relevant range? What is the
annual variable manufacturing cost?
3. What will Gummy Land’s relevant range of output be next year? How, if at all, will total annual fixed and
variable manufacturing costs change next year? Assume that if it needs to Gummy Land could buy an
identical machine at the same cost as the one it already has.

SOLUTION 2-28

(20 min.) Variable costs, fixed costs, relevant range.

1. The production capacity is 5,000 jaw breakers per month. Therefore, the current annual relevant range of
output is 0 to 5,000 jaw breakers × 12 months = 0 to 60,000 jaw breakers.

2. Current annual fixed manufacturing costs within the relevant range are $1,200 × 12 = $14,400 for rent and
other overhead costs, plus $6,500 ÷ 10 = $650 for depreciation, totaling $15,050.
The variable costs, the materials, are 40 cents per jaw breaker, or $18,720 ($0.40 per jaw breaker × 3,900
jaw breakers per month × 12 months) for the year.

3. If demand changes from 3,900 to 7,800 jaw breakers per month, or from 3,900 × 12 = 46,800 to 7,800 ×
12 = 93,600 jaw breakers per year, Gummy Land will need a second machine. Assuming Gummy Land buys a
second machine identical to the first machine, it will increase capacity from 5,000 jaw breakers per month to
10,000. The annual relevant range will be between 5,000 × 12 = 60,000 and 10,000 × 12 = 120,000 jaw
breakers.
Assume the second machine costs $6,500 and is depreciated using straight-line depreciation over 10 years
and zero residual value, just like the first machine. This will add $650 of depreciation per year.
Fixed costs for next year will increase to $15,700 from $15,050 for the current year + $650 (because rent
and other fixed overhead costs will remain the same at $14,400). That is, total fixed costs for next year equal
$650 (depreciation on first machine) + $650 (depreciation on second machine) + $14,400 (rent and other fixed
overhead costs).
The variable cost per jaw breaker next year will be 90% × $0.40 = $0.36. Total variable costs equal $0.36
per jaw breaker × 93,600 jaw breakers = $33,696.
If Gummy Land decides not to increase capacity and meet only that amount of demand for which it has
available capacity (5,000 jaw breakers per month or 5,000 × 12 = 60,000 jaw breakers per year), the variable
cost per unit will be the same at $0.40 per jaw breaker. Annual total variable manufacturing costs will increase
to $0.40 × 5,000 jaw breakers per month × 12 months = $24,000. Annual total fixed manufacturing costs will
remain the same, $15,050.

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2-37 Cost of goods manufactured, income statement, manufacturing company. Consider the following
account balances (in thousands) for the Peterson Company:
Beginning of End of
Peterson Company 2017 2017
Direct materials inventory 21,000 23,000
Work-in-process inventory 26,000 25,000
Finished-goods inventory 13,000 20,000
Purchases of direct materials 74,000
Direct manufacturing labor 22,000
Indirect manufacturing labor 17,000
Plant insurance 7,000
Depreciation—plant, building, and 11,000
equipment
Repairs and maintenance—plant 3,000
Marketing, distribution, and customer- 91,000
service costs
General and administrative costs 24,000

Required:

1. Prepare a schedule for the cost of goods manufactured for 2017.

2. Revenues for 2017 were $310 million. Prepare the income statement for 2017.

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SOLUTION 2-37
(30–40 min.) Cost of goods manufactured, income statement, manufacturing company.

1. Peterson Company
Schedule of Cost of Goods Manufactured
Year Ended December 31, 2017
(in thousands)

Direct materials cost

Beginning inventory, January 1, 2017 $ 21,000
Purchases of direct materials 74,000
Cost of direct materials available for use 95,000
Ending inventory, December 31, 2017 23,000
Direct materials used $ 72,000
Direct manufacturing labor costs 22,000
Indirect manufacturing costs
Indirect manufacturing labor 17,000
Plant insurance 7,000
Depreciation—plant building & equipment 11,000
Repairs and maintenance—plant 3,000
Total indirect manufacturing costs 38,000
Manufacturing costs incurred during 2017 132,000
Add beginning work-in-process inventory, January 1, 2017 26,000
Total manufacturing costs to account for 158,000
Deduct ending work-in-process inventory, December 31, 2017 25,000
Cost of goods manufactured (to Income Statement) $133,000

2. Peterson Company
Income Statement
Year Ended December 31, 2017
(in thousands)

Revenues $310,000
Cost of goods sold:
Beginning finished goods, January 1, 2017 $ 13,000
Cost of goods manufactured 133,000
Cost of goods available for sale 146,000
Ending finished goods, December 31, 2017 20,000
Cost of goods sold 126,000
Gross margin 184,000
Operating costs:
Marketing, distribution, and customer-service costs 91,000
General and administrative costs 24,000
Total operating costs 115,000
Operating income $ 69,000

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