Question: 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 labor
• Direct materials
• Utilities
• Depreciation
• Maintenance
• 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.
1. Explain what is involved in a product costing system.
2. Explain why Wilson-West Manufacturing needs to have a product costing system.
3. Allocate the above expenses as fixed, mixed, or variable expenses.
4. 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.
5. Explain this to Mr. Smith who will prepare these calculations on a monthly basis.