Question

The stores sell ten different styles of yoga pants with identical unit costs and selling prices. A unit is defined as one pair of yoga pants. Each store has a manager who is paid a fixed salary. Individual salespeople receive a fixed salary and a sales commission. The company is trying to determine the desirability of opening another store, which is expected to have the following revenue and cost relationships:

	Per Pair
Unit variable data:
Selling price	$60
Cost of pants	$29.50
Sales commissions	$4.50
Total variable costs	$34
Annual fixed costs:
Rent	$260,000
Salaries	$200,000
Advertising	$90,000
Other fixed costs	$70,000
Total fixed costs	$620,000

Consider each question independently.

1. Assume the cost of pants ($29.50) listed above includes both variable and fixed, direct

and indirect costs.

1. Explain what costs would be included in each of these categories (variable, fixed, direct, and indirect). Explain which terms describe the cost behavior and which terms describe the cost classification. Why is it important to consider cost behavior and cost classification when assigning costs?
2. If   direct materials included in this cost ($29.50) are $5.50 and direct   labor is $14, what is the manufacturing overhead assigned to one pair of pants?
3. Calculate the plantwide predetermined overhead rate (POHR). Assume that manufacturing overhead is   assigned based on direct labor hours (DLH). The actual direct labor hours to make one pair of pants is 1 hour. The information below relates to the companies estimated manufacturing and direct labor hours:

                          Estimated Total Manufacturing Overhead for the year: $300,000

                          Estimated Total Direct Labor Hours for the year: 30,000

Answer 1

a. Following are the cost categories:

Variable Cost:

Direct Materials, Direct Labor, Sales Commissions

Fixed Cost:

Rent, Salaries, Advertising, Other Fixed Cost

Direct Cost:

Direct Material, Direct Labor

Indirect Cost:

Manufacturing Overheads

Explain which term describe Cost behaviour ( Variable Cost and Fixed Cost )

Cost which increases by producing more number of units are called variable cost

Cost which does not vary with the increase in producing more number of units are called Fixed cost

Importance of Cost behaviour

To make decisions on accepting special order

Explain which term describe Cost classification ( Direct cost and Indirect Cost )

Cost which can be traceable to the production are called direct cost

Cost which cannot be traceable to the production are called indirect cost

Importance of Cost classification

To classify the cost to prime cost which is calculated by adding direct material and direct labor to produce a product.

b. Calculation of Manufacturing overheads:

Formula= Direct material+direct labor+manufacturing overheads=Total cost of pair

Manufacturing overheads = Total cost-Direct material-Direct labor

= 29.5 - 5.5 - 14

= 10 $

c. Plantwide predetermined overhead rate

Formula = Estimated Total manufacturing overheads for the year / Estimated Total Direct labor hours for the year

Plantwide predetermined overhead rate= $300,000/30,000 = $ 10 per direct labor hour

Manufacturing overhead per pair of pants = Predetermined overhead rate* direct labor hours for each pair of pants

Manufacturing overhead per pair of pants = 10 $ * 1 = 10 $ per pair