Chapter 3 Solutions

3-21 (a) Manufacturing (g) Marketing

(b) Selling (h) General and administrative
(c) Distribution (i) Manufacturing
(d) General and administrative (j) General and administrative
(e) Manufacturing (k) After-sales
(f) Research and development (l) Selling

3-22 (a) Indirect (g) Indirect

(b) Direct (h) Indirect
(c) Direct (i) Direct
(d) Indirect (j) Indirect
(e) Direct (k) Direct
(f) Indirect* (l) Indirect

* This overtime premium is not paid for every unit of output. It is paid only for
those units that are produced beyond the regular working hours. Even
though it is paid to workers working with their hands in the production
process, conventionally, this is treated as manufacturing support cost and not
as direct labor cost.

3-23 (a) Unit-related (g) Product-sustaining

(b) Batch-related (h) Business-sustaining
(c) Product-sustaining (i) Unit- or batch-related
(d) Business-sustaining (j) Unit -or batch-related
(e) Unit-related (k) Business-sustaining
(f) Batch-related (l) Product-sustaining
3-28

Cost classification
Cost of fabric used in dresses Direct material cost $60,000
Total direct material cost $60,000
Wages of dressmakers Direct labor cost $5,000
Wages of dress designers Direct labor cost $4,000
Total Direct labor cost $9,000
Wages of employee who Manufacturing $2,000
repairs the shop's pattern support
machines
Cost of electricity used in the Manufacturing 200
pattern department support
Depreciation on pattern Manufacturing 10,000
machines and sewing support
machines
Cost of insurance for the Manufacturing 2,000
production employees support
Rent for the building* Manufacturing 3,000
support
Total manufacturing support $17,200
cost
Wages of sales personnel Selling costs $ 1,000
Rent for the building** Selling costs 1,500
Total selling costs $2,500
Cost of new sign in front of Marketing costs $ 400
retail shop
Cost of advertisements Marketing costs 800
Cost of hiring a plane and a Marketing costs 1,400
pilot
Total marketing costs $2,600
Wages of designers who R&D costs $3,000
experiment
Total R&D costs $3,000
Salary of the owner's General & $1,200
secretary Administrative
costs
Rent for the building*** General & 1,500
Administrative
costs
Total general and $2,700
administrative costs
Total costs: $97,000

* Since, only one floor (out of the two available floors) is used for manufacturing, consider
1/2 of $6000 (i.e. $3,000) as rent for housing production related activities.
** Since, one half of the first floor is used (which amounts to 1/4 of the building), take
1/4($6,000) = $1,500 as selling cost
*** Using the same logic as above, since 1/4 of the building is used for administration,
administration portion of the rent is $1,500
b)
Unit related costs
Cost of fabric + Wages of dress makers + wages of dress designers =
$60,000+5000+4000= $ 69,000
(Since the design is custom (according to the data in the problem), I am
treating it as unit related activity)

Batch related costs

Wages of sales personnel = $1,000

Product sustaining costs

Cost of electricity in pattern dept. + wages of designers experimenting with new
designs = $200+$3000 = $3,200

Business sustaining costs include all other costs not listed above = $ 23,800
 Problems outside the textbook
1. Understanding manufacturing and selling costs

Osborne Companys monthly budget includes fixed manufacturing overhead costs

of $72,000 and fixed selling costs of $48,000. Management expects that each
month the company will produce and sell 12,000 calculators, the firms only product.

Estimated unit costs are as follows:

Cost Item Unit Cost

Direct materials $32
Direct labor 20
Variable manufacturing support 15
Fixed manufacturing support 6
Variable selling 3
Fixed selling 4

Compute the following amounts:

1. Estimated conversion cost per unit.

2. Estimated prime cost per unit.
3. Estimated variable cost per unit.
4. Estimated total cost of operations when the firm plans to produce 12,000 units
and sell 12,000 units.

1. Conversion cost per unit = direct labor + total manufacturing overhead per unit

= $20 + $15 + $6 = $41 per unit

2. Prime cost per unit = direct material + direct labor

= $32 + $20 = $52 per unit

3. Total variable cost per unit = direct material + direct labor + variable manufacturing support +
variable selling cost

= $32 + $20 + $15 + $3 = $70 per unit

4. Total cost for 12,000 units of production and 12,000 units of sales are determined as follows:

Direct Material (12,000 units $32) $384,000

Direct Labor (12,000 units $20) 240,000
Manufacturing Support:
Variable (12,000 units $15) 180,000
Fixed 72,000
Selling costs:
Variable (12,000 units $3) 36,000
Fixed 48,000
Total $960,000
2. Learning to estimate future support costs:

XYZ Company has estimated the following relationship between its manufacturing
support cost and the drivers influencing the support cost.

Support cost = $100 (number of setups) + $2,000 (number of products) + $15

(number of direct labor hours) + $ 25(number of machine hours).

The expected activity levels for the months of September and October follow:

Number of Number of Number of Number of

setups products direct labor machine hours
hours
September 100 3 2000 4000
October 140 4 3000 5500

Estimate the manufacturing support cost for September and October:

Estimated cost for September = $100 (100) + $2,000 (3) + $15 (2000) + $25 (4000)
= $10,000 + $6,000 + $ 30,000 + $ 100,000
= $ 146,000

Estimated cost for October = $ 100 (140) + $2,000 (4) + $15 (3,000) + $25 (5,500)
= $ 14,000 + $8,000 + $ 45,000 + $ 137,500
= $ 204,500