Cost Terminology; Contribution Format Income Statement
Miller Company’s total sales are $120,000. The company’s direct laborcost is $15,000, which represents 30% of its total conversion cost and 40% of its total prime cost. Its total selling and administrative expense is $18,000 and its only variable selling and administrative expense is a sales commission of 5% of sales. The company maintains no beginning or ending inventories and its manufacturing
Required:
1.What is the total manufacturing overhead cost?
2. What is the total direct materials cost?
3. What is the total
4. What is the total variable selling and administrative cost?
5. What is the total variable cost?
6. What is the total fixed cost?
7. What is the total contribution margin?
1.

Introduction: Overhead cost includes the cost of indirect material, labor and other expenses. Overhead cost is not related to cost of production this is the reason it specify as indirect cost. The example of overhead cost is administration cost, selling and distribution cost and other.
To compute: The total manufacturing overhead cost.
Answer to Problem 22P
Solution: The total manufacturing overhead is $35,000.
Explanation of Solution
Given,
Direct labor cost is $15,000
Direct labor cost is 30% of conversion cost
Conversion cost is $50,000
Formula to calculate the manufacturing overhead is,
Substitute $50,000 for conversion cost and $15,000 for direct labor cost in the above formula,
Working Notes:
Calculate conversion cost,
Thus, total manufacturing overhead is $35,000.
2.

Introduction: Direct cost is the cost that is attributed to particular product. Direct cost is also known as identifiable cost that cost is easily identifiable, for example company spend money to purchase raw material for production of product then the cost of purchasing raw material is direct cost.
To compute: The total direct material cost.
Answer to Problem 22P
Solution: The total direct material cost is $22,500.
Explanation of Solution
Given,
Direct labor cost is $15,000
Direct labor cost is 40% of prime cost
Prime cost is $37,500
Formula to calculate the direct material cost is,
Substitute $37,500 for prime cost and $15,000 for direct labor cost in the above formula,
Working Notes:
Calculate prime cost,
Thus, the total direct material cost is $22,500.
3.

Introduction: Direct cost is the cost that is attributed to particular product. Direct cost is also known as identifiable cost that cost is easily identifiable, for example company spend money to purchase raw material for production of product then the cost of purchasing raw material is direct cost.
To compute: The total manufacturing cost.
Answer to Problem 22P
Solution: The total manufacturing cost is $72,500.
Explanation of Solution
Given,
Direct labor cost is $15,000
Manufacturing overhead is $35,000 (calculated in 95484-1-22P1)
Direct material is $22,500 (calculated in 95484-1-22P2)
Formula to calculate total manufacturing cost is,
Substitute $22,500 for direct material cost, $15,000 for direct labor cost and $35,000 for manufacturing overhead in the above formula,
Thus, the total manufacturing cost is $72,500.
4.

Introduction: Indirect cost includes the cost of indirect material, labor and other expenses. Indirect cost is not related to cost of production this is the reason it specify as overhead cost. The example of indirect cost is administration cost, selling and distribution cost and other.
To compute: The total variable selling and administrative cost.
Answer to Problem 22P
Solution: The total variable selling and administrative cost is $6,000.
Explanation of Solution
Given,
Sales is $120,000
Variable selling and administrative expenses are 5% of sales
Formula to calculate the variable selling and administrative cost is,
Substitute $120,000 for sales in the above formula,
Thus, the total variable selling and administrative cost is $6,000.
5.

Introduction: The cost of production that is flexible based on the level of production is called variable cost. It is included to report the total cost of production.
To compute: The total variable cost.
Answer to Problem 22P
Solution: The total variable cost is $43,500.
Explanation of Solution
Given,
Direct labor cost is $15,000
Direct material cost is $22,500 (calculated in 95484-1-22P2)
Variable selling and administrative cost is $6,000 (calculated in 95484-1-22P4)
Formula to calculate the total variable cost is,
Substitute $22,500 for direct material cost, $15,000 for direct labor coat and $6,000 for selling and administrative cost in the above formula,
Thus, the total variable cost is $43,500.
6.

Introduction: Fixed costs are the cost that does not change with the change in production. The company has to bear fixed cost whether production occurs or not. Rent, electricity is some of the example of fixed cost.
To compute: The total fixed cost.
Answer to Problem 22P
Solution: The total fixed cost is $47,000.
Explanation of Solution
Given,
Manufacturing overhead is $35,000 (calculated in 95484-1-22P1)
Variable Selling and administrative cost is $6,000 (calculated in 95484-1-22P4)
Total selling and administration cost is $18,000
Fixed selling and administrative expense is $12,000 (working notes)
Formula to calculate the total fixed cost is,
Substitute $35,000 for manufacturing overhead and $12,000 for fixed selling and administrative cost in the above formula,
Working Notes:
Calculate the fixed selling and administrative expense,
Thus, the total fixed cost is $47,000.
7.

Introduction: Income Statement includes the information of net income earn or net loss suffered by the company. The expenses deducting from revenue and the resultant is net income or loss to the company. This is informative report that helps the user of financial information to take decision.
To compute: The total contribution margin.
Answer to Problem 22P
Solution: The total contribution margin is $76,500.
Explanation of Solution
Given,
Sales is $120,000
Total variable cost is $43,500 (95484-1-22P5)
Formula to calculate the total contribution margin is,
Substitute $120,000 for sales and $43,500 for variable cost in the above formula,
Thus, the total contribution margin is $76,500.
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Chapter 1 Solutions
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