Chapter 18, Problem 1BPSB

Requirement 1.

To determine

Introduction:

Variable cost is the cost which is associated with the amount of goods or services the company produces. It varies with the level of production volume. If the company’s production increases, Variable cost will increase. However, in case there is no production, no Variable cost will be incurred.

Fixed cost is the cost which does not vary with the level of production. It is not affected with the change in production level. A company continues to incur its Fixed cost even in the case if there is no production at all.

Product costs are the cost of Direct Material, Direct Labour and Manufacturing Overheads used in making the product.

Period costs are usually associated with the selling function of the business or its general administration. Period costs are reported in the accounting period in which they best match with revenues, when they expire or in the current accounting period. Interest expenses are also in the nature of period expense.

To state:

Whether the costs are (a) either Variable or Fixed and (b) either Product or Period

Answer to Problem 1BPSB

Solution:

Classification of costs

Figures (in $)

Costs	Variable	Fixed	Product	Period
Plastic for BDS	1,500		1,500
Wages of assembly workers	30,000		30,000
Cost of factory rent		6,750	6,750
System staff salaries		15,000		15,000
Labeling	3,750		3,750
Cost of equipment rent		1,050		1,050
Upper management salaries		1,20,000		1,20,000
Annual fixed fee for cleaning service		4,520	4,520
Sales commissions	7,500			7,500
Machinery depreciation, straight-line		18,000	18,000

Explanation of Solution

In case of Plastic for BDs, the cost will keep on varying with the production level; therefore, it would be a Variable cost. Also, it is a part of Manufacturing Overheads; therefore, it would be covered under Product cost.

For Wages of assembly workers, the cost would vary with the production level, therefore it would be covered under Variable cost. Moreover, it is a part of Direct Labour; thus it would be a Product cost.

Cost of factory rent is a cost which would be constant despite the production level; therefore, it would be in the nature of Fixed cost. Further, it is a part of Manufacturing Overheads; therefore, it would be covered under Product cost.

In the case of System staff salaries, this cost would continue to be incurred and is not affected with the change in production level, therefore is a Fixed cost. Also, these costs are related to the general administration, therefore, would be covered under Period cost.

Labeling cost would keep on varying with the production level; therefore, it would be a Variable cost. Also, it is a part of Manufacturing Overheads; thus it would be covered under Product cost.

Further, the amount of Labeling has been computed as follows:

For Cost of equipment rent, this cost would continue to incur and is not affected with the change in production level, therefore is a Fixed cost. Further, these costs relate to the selling function of the business, thus would be in the nature of Period cost.

Upper management salaries this cost would continue to be incurred and is not affected with the change in production level, therefore is a Fixed cost. Also, these costs are related to the general administration, therefore, would be covered under Period cost.

In the case of Annual fixed fee for cleaning service, this cost would continue to incur and is not affected with the change in production level, therefore is a Fixed cost. Further, it is a part of Manufacturing Overheads; therefore, it would be covered under Product cost.

Sales commissions would vary with the level of production, therefore covered under Variable cost. Also, these costs relate to the selling function of the business, thus would be in the nature of Period cost.

Further, the amount of sales commission has been computed as follows:

For Machinery depreciation, straight-line, this cost would continue to incur and is not affected with the change in production level, therefore is a Fixed cost. Further, it is a part of Manufacturing Overheads; therefore, it would be covered under Product cost.

Conclusion

The various costs incurred by the concern can be classified as Variable/ Fixed or Product/ Period as per their nature.

The cost varying with the level of production volume would be in the nature of Variable cost.

Fixed cost would be which is not affected with the change in production level.

Product costs are cost of Direct Material, Direct Labour and Manufacturing Overheads used in making the product.

Costs associated with selling function of the business or its general administration would be the Period costs.

Requirement 2.

To determine

Introduction:

Manufacturing costs are the costs necessary to convert Raw Materials into products. These costs include the cost of Direct Material, Direct Labour and Manufacturing Overheads.

Direct Material is the cost of materials used in production of a product.

Direct Labour is that portion of Labour cost of the production process that is assigned to a unit of production.

Manufacturing Overheads are applied to production units based on a variety of possible allocation systems, such as direct labour hours or machine hours.

To calculate:

Manufacturing cost per Blu- ray disc

Answer to Problem 1BPSB

Solution:

Calculation of Manufacturing cost per Blu-ray disc

Figures (in $)

Item	Total cost (at 15,000 units)	Per unit cost
Variable Manufacturing Costs
Plastic for BDS	1,500	0.10
Wages of assembly workers	30,000	2.00
Labeling	3,750	0.25
Total Variable Production costs	35,250	2.35
Fixed Manufacturing Costs
Cost of factory rent	6,750	0.45
Annual fixed fee for cleaning service	4,520	0.30
Machinery depreciation, straight-line	18,000	1.20
Total Fixed Manufacturing Costs	29,270	1.95
Total Manufacturing cost	64,520	4.30

Explanation of Solution

To calculate Manufacturing cost per Blu- ray disc, following equation will be used:

In the given problem, following are the Variable Manufacturing costs:

• Plastic for BDs: $1,500

Wages of assembly workers: $30,000

Labeling: $3,750

Further, below- mentioned are the Fixed Manufacturing costs incurred:

• Cost of factory rent: $6,750

Annual fixed fee for cleaning service: $4,520

Machinery depreciation, straight-line: $18,000

Since the total number of Blu- ray discs purchased is 15000 units, per unit cost would be calculated by dividing the Costs incurred by 15000 units. For example, in the case of Plastic for BDs, cost is $1,500 which would mean that per unit cost is $0.10, that is

Total Manufacturing cost would be sum of all Variable as well as fixed Manufacturing cost, that is

Conclusion

The Manufacturing cost per Blu- ray Disc is coming out to be $4.30. It means that the company would be incurring $4.30 to manufacture 1 unit of Blu-ray disc.

Requirement 3.

To determine

Introduction:

Manufacturing costs are the costs necessary to convert Raw Materials into products. These costs include the cost of Direct Material, Direct Labour and Manufacturing Overheads.

Variable cost is the cost which is associated with the amount of goods or services the company produces. It varies with the level of production volume. If the company’s production increases, Variable cost will increase. However, in case there is no production, no Variable cost will be incurred.

To determine:

Total cost and per unit cost of the plastic for Blu- ray Discs

Answer to Problem 1BPSB

Solution:

Explanation of Solution

Plastic for BDs is a Variable Cost because it will keep on varying with the production level.

When 10000 Blu- ray discs are produced instead of 15000, the Total Variable cost would tend to decrease since the production level has increased. Therefore, Total Variable costs would be:

Further, there would not be any change in the per unit cost of Plastic for BDs.

Conclusion

If 10000 Blu- ray discs are produced, total cost for the Plastic for BDs is expected to decrease to $1,000. However, per unit cost remains at $0.10 per Blu- ray disc. Variable costs decrease in the total as the number of unit produced decreases but per unit cost remains constant

Requirement 4.

To determine

Introduction:

Manufacturing costs are the costs necessary to convert Raw Materials into products. These costs include the cost of Direct Material, Direct Labour and Manufacturing Overheads.

Fixed cost is the cost which does not vary with the level of production. It is not affected with the change in production level. A company continues to incur its Fixed cost even in the case if there is no production at all.

To determine:

Total cost and per unit cost of factory rent

Answer to Problem 1BPSB

Solution:

Explanation of Solution

The total cost for Factory rent remains the same at $6,750 if 10000 Blu- ray discs are produced since it is a Fixed cost. It is not affected with the change in level of production.

However, when 10000 Blu- ray discs are produced instead of 15000, per unit cost would increase due to the reason that there has been decrease in the number of units produced.

Conclusion

If 10000 Blu- ray discs are produced, total cost for the Factory rent remains the same at $6,750. However, per unit cost increases to $0.675 per Blu- ray disc. Fixed costs do not change in total with production level but the per unit cost increases as production decreases.