You, the managerial accountant, are asked by the CFO (Mr. Smith) of Wilson–West Manufacturing (a new company) to set up a product costing system. The following are the types of expenses that will be included:
- Direct materials
- Insurance on the equipment
- Rent on the plant
- Administrative salaries
- Rent for the office
In a memo format, explain to Mr. Smith and the president what will be included in product costing.
- Explain what is involved in a product costing system.
- Explain why Wilson–West Manufacturing needs to have a product costing system.
- Allocate the above expenses as fixed, mixed, or variable expenses.
- Prepare calculations for the following, and explain your computations:
- Variable cost: The unit rate is $0.25, and the actual hours used for manufacturing are 15,000.
- Mixed cost: The unit rate is $0.25, actual hours are 10,000, and the fixed cost is $5,000 per month.
- Total cost: Use your calculations from above.
- Explain this to Mr. Smith who will prepare these calculations on a monthly basis.