Question

Your friend, Suzie Whitson, has designed a new type of outdoor toy that helps children learn basic concepts such as colors, numbers, and shapes. Suzie's product will target two groups: day care centers in warm climates and home school programs. Her company is Jiffy Jet and costs for last month follow Factory rent Company advertising Wages paid to assembly workers Depreciation for salespersons' vehicles Screws Utilities for factory Assembly supervisor's salary Sandpaper President's salary Plastic tubing Paint Sales commissions Factory Insurance Depreciation on cutting machines Wages paid to painters $ 3,190 1.11e 31.600 2.100 575 895 3,640 120 5,120 4, 12e 230 1.33e 1.se 2.02e 7,55e Assume that Suzie Whitson has decided to begin production of her outdoor children's toy. Required: 1 and 2. Identify each of the preceding costs as either a product or a period cost. If the cost is a product cost, decide whether it is for direct materials (DM), direct labor (DL), or manufacturing overhead (MOH) and also identify each of the preceding costs as variable or fixed cost

Answer 1

1 & 2) Fixed costs are those costs which would remain the same in total irrespective of level of production or sales. It is a committed cost to be incurred by the firm whether it carries out operations or not. Variable costs are those costs which would remain the same per unit irrespective of level of production or sales. It is an unit cost to be incurred by the firm only when the firm carries out its business operation. Product costs are those costs which are incurred at the factory level during production process which may be direct or indirect costs. Of which, variable product costs will change when production volume increases or decreases whereas fixed product costs do not change, unless there are some conditions that have the capability to decrease or cause to increase the same. Direct costs are those product costs that are directly attributable to products manufactured. In other words, these costs are avoidable costs in nature and are not expected to incur if there is no production. Examples are: Direct Materials (DM) and Direct Labor (DL) Mfg. Overhead Costs (MOH) are also called as indirect costs which are those product costs that are not directly attributable to any particular products manufactured. In other words, these costs are common costs in nature and are incurred whether there is production or not. Period costs are those costs which are incurred outside the factory but for carrying out firm's selling and administrative related operating activities and financing activities. Of which, variable period costs will change when sales volume increases or decreases whereas fixed period costs do not change, unless there is any particular condition that has the capability to decrease and cause to increase the same.

Costs Factory rent Company advertising Wages paid to assembly workers Depreciation for salespersons' vehicles Screws Utilities for factory Assembly supervisor salary Sandpaper President's salary Plastic tubing Paint Sales commissions Factory insurance Depreciation on cutting machines Wages paid to painters Type of Cost Product Period Product Period Product Product Product Product Period Product Product Period Product Product Product Cost Head MOH NA DL NA MOH MOH MOH MOH NA DM MOH NA MOH MOH Cost Classification Indirect (Fixed) Fixed Direct (Variable) Fixed Indirect (Variable) Indirect (Variable) Indirect (Fixed) Indirect (Variable) Fixed Direct (Variable) Indirect (Variable) Variable Indirect (Fixed) Indirect (Fixed) Direct (Variable) DL NOTE: NA stands for Not Applicable. As period costs are not related to product costs, there is no cost head. 3) Prime costs are basic cum necessary costs to be incurred to manufacture products. In simple terms, direct costs such as direct materials and direct labor are the prime costs. Conversion costs are those manufacturing costs that are necessary to convert raw materials into final output in the manufacturing process. They include direct labor and manufacturing overhead costs.

Total product costs equal to sum of direct materials, direct labor and manufacturing overhead costs. a) Direct Materials b) Direct Labor c) Manufacturing Overhead d) Prime Cost e) Conversion Cost f) Total Product Cost g) Total Period Cost h) Total Variable Cost i) Total Fixed Cost $4,120 (Cost of Plastic tubing] $39,150 (Cost of Wages paid to assembly workers & Wages paid to painters = $31600 + $7550] $11,720 [$3190 + $575 + $895 + $3640 + $120 + $ 230 + $1050 + $2020] $43,270 [Direct Materials + Direct Labor = $4120 + $39150 --> Ref: Part - (a) & (b)] $50,870 [Direct Labor + Mfg. Overhead = $39150 + $11720 --> Ref: Part - (b) & (c)] $54,990 [Direct Materials + Direct Labor + Mfg. Overhead = $4120 + $39150 + $11720 --> Ref: Part - (a), (b) & (c)] $9,660 (Cost of Company advertising, Depreciation for salespersons' vehicles, President's salary & Sales commissions = $1110 + $ 2100 + $5120 + $1330] $46,420 ($31600 + $575 + $895 + $120 + $4120 + $230 + $1330 + $7550 --> Including Product Costs & Period Costs] $18,230 [$3190 + $1110 + $2100 + $3640 + $5120 + $1050 + $2020 --> Including Product Costs & Period Costs]