Question

ALASKA MANUFACTURING began its first year of operations on January 1, 2018. Costs incurred for 2018 were as follows: $147,600 Variable Direct materials used Direct manufacturing labor cots 38,400 Variable Plant energy costs 2,000 Variable Indirect manufacturing labor costs 14,000 Variable Indirect manufacturing labor costs Other indirect production costs 19,000 Fixed 11,000 Variable Other indirect production costs 14,000 Fixed Marketing, distribution and customer-service costs 128,000 Variable Marketing, distribution and customer-service costs 48,000 Fixed 56,000 Fixed Administrative costs Variable manufacturing costs are variable with respect to units produced, while variable marketing, distribution and customer-service costs are variable with respect to units sold. Inventory data is as follows Ending: December 31, 2018 2,400 lbs. Beginning: January 1, 2018 0 lbs Direct materials Work in process 0 units 0 units Finished goods 0 units ? units In 2018, the company produced 123,000 units. Company standards require 2 pounds of direct material per unit. Revenues for 2018 were $594,000. The selling price per unit and the purchase price per pound of direct materials were constant throughout the year. Finished-goods inventory at December 31, 2018 was $26,000. Required: 1. What's a variable cost? What's a fixed cost? Give an example of each. WHY is this an important distinction to make? 2. What's meant by a standard as used above? 3. Calculate the ending direct materials inventory (in $$) at December 31, 2018. 4. Calculate the ending finished-goods inventory (in units) at December 31, 2018. 5. Determine the selling price in 2018. 6. Compute the operating income for 2018. 7. What was the contribution margin per unit? What does this mean? 8. What was the contribution margin ratio? What does this mean? 9. What is the cost function (formula) that the company could use to estimate total costs for a year any level of production?

Answer 1

1)Variable cost is a cost that varies with output whereas fixed cost remains constant irrespective of number of units produced /sold .

Example of Variable cost :Material used in production ,wages ,etc.

Example of fixed cost :Rent ,Insurance for building ,depreciation using straight line etc.

The distinction is necessary while making decision as to acceptance of special offer ,make or buy output further processing etc. while making such decisions ,since fixed cost is constant it is irrelevant.

2)Standards are the amount set by organization as an budgeted amount against which actual results are compared and variance are calculated.

3)Material Used in production =Unit produced *direct material consumption per unit

               = 123000*2

               = 246000 Ibs

Price per Ibs =Direct material used in $ /Material used in Ibs

                 = 147600/246000

                = $ .60 per Ibs

Cost of ending inventory = Ending inventory*cost per Ibs

                               = 2400*.60 = $ 1440

4)Total production cost= Direct material used+direct manufacturing labor cost+plant energy cost+Indirect manufacturing cost+other indirect production cost

=147600+38400+2000+14000+19000+11000++14000

= 246000

production cost per unit =Total production cost/units produced

            = 246000/123000

            = $ 2per unit

Units in ending finished goods inventory =Total cost of ending FG/production cost per unit

           =26000/2

         = 13000units

Purchase cost